Rising demand for private credit is driving growth in fund finance, with the market now surpassing $1tn (£737.9bn), according to new research from Moody’s Ratings.
The ratings agency said fund finance facilities have evolved into a distinct standalone asset class, as private credit funds shift from being purely borrowers to acting as both borrowers and lenders.
Moody’s added that the growth in the number of private credit funds has been a key driver of expansion in fund finance, with their granular and self-amortising loan portfolios making them natural fund finance borrowers.
The agency also noted that, as private equity and credit funds face delayed exits and refinancings, fund finance has emerged as a critical backstop, bridging liquidity gaps and supporting managers’ own balance sheet management.
Overall, this has contributed to the fund finance market reaching $1tn, Moody’s said.
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“As private market fund investors are becoming more accepting of fund level leverage, the rise of private credit and fund finance are mutually reinforcing,” Moody’s said.
“Fund finance has grown and diversified alongside the expansion of private capital, and is now increasingly regarded as an asset class in its own right.”
The ratings agency said net asset value (NAV) lending, asset-based lending (ABL) and rated note feeders are emerging as key growth areas within fund finance, attracting institutional investors seeking higher returns while accepting increased complexity risk.
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“Fund finance has transformed from a simple set of tools principally used for operations early in a fund’s life into a broader customized set of solutions to support capital access, leverage and liquidity management,” said Moody’s.
As the market expands, however, private credit fund managers will need to maintain prudent underwriting discipline and rigorously stress-test leverage-on-leverage structures.
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