The global fund finance market has exceeded $1tn in size, supported by rapid expansion in private credit activity, according to a report by Reuters citing new research by Moody’s Ratings.
What was once a niche liquidity tool for private funds has evolved into a core financing mechanism, with Moody’s describing it as an increasingly important backstop for private credit lenders as the number of dedicated funds continues to grow.
A key driver of this expansion has been the rise of net asset value (NAV) lending, where loans are secured against the underlying assets of investment funds. These structures are now widely used by private credit managers, offering longer maturities and more flexible terms in exchange for higher risk exposure.
Moody’s also highlighted the growing use of hybrid financing structures that combine NAV-based security with investor capital commitments, reflecting a broader shift toward more complex fund-level leverage strategies.
At the same time, the report pointed to increasing integration between borrowers and lenders within private credit markets, as fund managers both originate and participate in NAV-linked financing.
However, Moody’s raised concerns about emerging risks, including weakening asset quality in US direct lending and potential stress linked to artificial intelligence-driven disruption in sectors such as software, which could affect credit performance and investor sentiment.
The report also noted rising exposure to payment-in-kind structures, which allow borrowers to defer interest payments by adding them to principal balances, potentially increasing repayment risk over time.
As the market continues to expand, Moody’s stressed the importance of disciplined underwriting and rigorous stress testing of layered leverage structures.
Banks active in NAV lending have also begun packaging portions of these exposures into asset-backed securities, broadening investor participation while redistributing risk across capital markets.
