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Marta Canini

Fund finance entered 2025 riding high on a wave of enthusiasm. Funds needed liquidity amid the M&A slowdown, and banks and other lenders alike were keen to provide it. NAV facilities, collateralised fund obligations (CFOs), and rated note feeders (RNFs) were the talk of the town, and issuance this year has shattered records.

Accurate figures for the broad fund finance market are difficult to come by — many deals are private and bilateral — but in more visible products, 2025 has been a boom year. Through early September, KBRA reported $16bn in CFO and $9bn in RNF issuance, figures that it said surpassed the volume of every prior full year.

But as the year draws to a close, there is a note of caution amid the exuberance.

Margins have compressed, covenants have softened, and Fitch Ratings has warned that rapid growth and fierce competition are driving structural weakening across a range of fund finance products.

Many market participants see this as the natural evolution of a maturing asset class enjoying wider investor and lender participation, but concerns are brewing about the vulnerability of NAV loans to a broader downturn in 2026, particularly in more concentrated portfolios.

Meanwhile, sponsors continue to tweak structures to optimise execution, with more deals seeking ratings to tighten spreads and attract insurance capital to the market.

Fund finance has never been more competitive. Once a bank-driven market, it is now increasingly also home to private credit and insurance capital, and even family offices, which puts pressure on pricing and covenants.

"It's natural: when a product grows, terms evolve,” said Anthony Lombardi, fund finance partner at Dechert. “Competition is increasing within fund finance, and while some sponsors get slightly better terms, you still have fundamentally low LTVs."

Margins have tightened across the board. Subscription lines, which previously commanded margins above 2%, are now often below that threshold, depending on sponsor, asset class, and risk profile.

"We are probably close to all-time lows on sub lines,” said Neno Raic, partner at NLC Capital Partners, an investment firm specialising in fund finance. “We're even seeing some ABL facilities being priced tighter than sub line facilities, which historically never happened."

The same phenomenon has extended into NAV loans, with sources reporting margin tightening of 100-200bps.

According to Jennifer Passagne, who recently joined Paul Hastings as fund finance partner, European sponsors generally have strong bargaining power and can push for lighter structures and looser terms, increasingly insisting on using their own precedent forms.

"In NAV loans, one of the main protections for a lender is strong cash flows from the underlying investments. If lenders are comfortable with that pool, security-light structures can make sense," said Passagne.

According to Richard Sehayek, partner and co-head of European alternative credit at Ares Management, bespoke fund financing solutions are emerging.

“The fund finance market is now characterised by greater demand for customised solutions as managers seek to address specific liquidity needs as opposed to adopting a one-size-fits-all approach,” he said. “Given the availability of flexible capital, it’s become a highly tailored marketplace for borrowers.”

He continued: “We’re seeing more demand from family offices who, while asset rich, require liquidity for opportunistic investments. That’s a growing part of the market."

Sub lines remain the most mature and established product in the fund finance catalogue, and their versatility has come to the fore amid the price compression and turbulence.

Throughout 2025, sub lines have evolved from a funding tool into a strategic capital management instrument, with funds using them to optimise IRRs, smooth capital activity, and manage deployment activity.

"Subscription lines are now used not only to fund acquisitions but as a cost-effective borrowing tool at the fund level, reflecting a shift from tactical liquidity toward optimised capital management," said NLC’s Raic.

Despite reaching over $1trn in market size by some estimates, sub lines have experienced only two defaults in the history of the market, both involving fraud as opposed to credit stress.

Post-scandal reforms have reduced the chance of recurrence, although risk still exists across all product offerings. Subscription lines are increasingly forming the basis of securitisations, both in cash and synthetic format. Goldman Sachs issued a second deal from its Capital Street Master Issuer shelf in 2025, and several banks have issued subscription line significant risk transfer transactions, including a $6bn transaction from Bank of America and other deals of up to $8bn in size.

Collateralised fund obligations and rated note feeders were the breakout stars of 2025.

“The big trend this year has been CFOs,” said Ares’ Sehayek. ”We expect to see several trades come to market in the early part of next year in the €1bn-2bn range.”

Two flagship CFO transactions set the tone this year — Coller Capital’s $2.4bn private market secondaries transaction in April with Barings and Ares, and Carlyle AlpInvest’s $1.25bn deal in August, which was also the largest publicly-rated structure of this kind.

Since then, several sponsors have explored different iterations of these models. Dechert worked on over 25 CFO and RNF deals in 2025.

“Originally, CFOs were predominantly LP-led, and as such, backed by very diversified pools of funds across many different managers,” noted NLC’s Raic. “Since then, larger asset managers have been using them as a fundraising tool by offering exposure across multiple funds they manage in order to attract different pools of capital. The use case is slightly different.”

Insurance capital has become the key accelerator for these products, driving demand for matching adjustment-eligible structures.

While US insurers can invest in CFO instruments on the basis of ratings, in public or private format, EU and UK insurers can achieve greatest capital efficiency by investing in instruments which qualify for the Solvency II or UK Solvency “matching adjustment”.

This gives a capital benefit if an insurance asset’s cashflows can be matched to a liability profile — for example, annuity payments for a life insurer. Matching assets must have cashflows which are certain (which implies call protection through make-whole clauses) and amortisation according to fixed schedules.

Funds may not naturally produce fixed income streams, but structuring can help bridge the gap — reserve fund or liquidity support mechanics can smooth CFO income streams into MA-eligible formats.

According to Fitch’s report, CFOs and RNFs are drifting away from the historically diversified collateral pools that characterised the early versions of these products — but concentration isn’t always what it seems.

“It’s a very one-dimensional lens to look only at concentration,” said Raic. “The devil is in the details. For a rated feeder you have one fund, but deep underlying asset diversification. For a CFO, you have multiple funds. In our experience, the rating agency underwriting has been quite robust.”

Fitch noted that new transactions with weaker terms have resulted in lower ratings.

Another standout trend in 2025 has been the rise of GP financing, driven by investor pressure for GPs to commit more capital to their own funds amid a subdued M&A and IPO market — which is preventing some PE firms from realising their investments through sale or flotation.

Expected GP commitments have risen from 3% to as high as 5%, according to Ropes and Gray. Even as markets improve, GPs need more skin in the game — and they’d prefer someone else to finance it.

Private credit funds have been particularly active in this area, offering flexible facilities secured against management fees, carry and GP stakes.

“We observe that GPs are raising more than they have historically, and faster. As this market grows, it will be very interesting to see where it goes, especially if fundraising returns to pre-rate-spike levels,” said NLC’s Raic.

NAV facilities, meanwhile, are a staple of fund finance, but their reliance on exit markets and valuations makes them particularly vulnerable to a downturn.

"NAV financing requires discipline,” said Adam Heaysman, head of funds finance at Triple Point, which launched a fund finance strategy in November.

”You need to be aware of the risks and structure accordingly — valuations can be impacted by market forces beyond the funds' control. You're ultimately dependent on exiting those assets to repay the facility. So you need strong covenant protections and the right managers who can navigate companies through challenges."

Real estate and infrastructure NAVs pose additional challenges due to limited liquidity. Unwinding these positions when valuations fall is harder than with more liquid portfolio strategies.

“In the next downturn, NAV will likely be the structure that feels stress first — but it always comes back to how much cushion you have, who the sponsor is, and what industry you’re exposed to,” said Raul Llanes, managing director, capital markets, BCI Capital.

On the bright side, if 2023-2024 was the period when LP-GP tensions peaked, 2025 was the year they stabilised.

“The first question in any NAV financing is: have you consulted your LPs? This transparency has become standard and strengthens the product,” said Lombardi, the Dechert partner.

While competition and spread compression persist, volume growth is expected to continue, especially across CFOs and RNFs, with a handful of multi-billion-dollar deals set to come to market in Q1 2026.

Fund finance is able to support bespoke and innovative structures, but the mainstream of the market may see more standardisation. S&P predicts that innovation will gradually give way to standardisation as regulators and investors demand greater transparency and consistency.

A spike in interest rates or a broader credit market downturn in 2026 could see pricing widen again, but low LTVs, strong collateral, and liquidity in secondary markets suggest resilience.

“Those deals that have been structured carefully, with appropriate covenants and LTV triggers, will underpin the resilience of the asset class,” said Ares’ Sehayek.

Another emerging trend to keep watching in 2026 is the growing engagement of rating agencies in concentrated NAV deals.

While most fund finance ratings remain private or confidential, 9fin understands that a rising number of sponsors behind concentrated NAV facilities are seeking them, primarily to tap insurance capital and tighten spreads.

Ratings could drive further market standardisation, as issuers will be incentivised to meet specific rating agency criteria.

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