Ask most people how a private equity fund pays for a deal and they’ll describe the obvious version: the fund calls capital from its investors, the investors wire it in, the deal closes. That version is increasingly historical. Between the handshake and the wire sits a quiet, enormous credit market — and it changes how returns look, how risk works, and occasionally how crises happen.
The subscription line: a bridge that became a highway
A subscription credit facility is a loan to the fund secured not by assets but by the unfunded commitments of its investors — the bank is effectively lending against the LPs’ promises to pay. Originally these lines existed for convenience: close the deal Tuesday, call capital at the quarter with one clean notice instead of ten frantic ones. Convenience, however, discovered a side effect: every day a deal is held on borrowed money before investor capital comes in is a day that doesn’t count against the clock on the fund’s internal rate of return. Delay the capital call, shorten the measured holding period, and the IRR — the headline number funds are ranked by — improves without the underlying investment changing at all.
This is why subscription lines went from niche convenience to near-universal practice, and why sophisticated LPs now ask two versions of every performance number: with and without the facility’s effect. It’s also why comparing two funds’ IRRs without knowing their credit-line habits is comparing lap times without knowing who got a rolling start.
NAV lending: borrowing against the portfolio itself
Later in a fund’s life the commitments are mostly drawn, so the collateral flips: NAV facilities lend against the value of what the fund already owns. Managers use them to support portfolio companies, fund follow-ons, or return cash to investors without selling assets in a bad market. Used carefully, that’s flexibility; used aggressively, it’s leverage stacked on illiquid marks — distributions today secured against valuations that haven’t met a buyer yet. The 2022–2023 slowdown in exits made NAV lending one of the fastest-growing corners of private credit, and one of the most argued-about.
Why this matters beyond the plumbing
Fund-level credit sits at the intersection of three parties’ incentives: managers want smooth operations and strong reported numbers, LPs want real returns and honest measurement, banks want secured lending with low losses (which, historically, this has been). Most of the time everyone wins. The stress scenario — the reason this corner of finance deserves attention — is correlation: the same conditions that freeze exits and pressure valuations are the ones that make LPs slow to fund and banks quick to tighten. The plumbing works until everyone needs it at once.
For readers who want the full mechanics — how the facilities are structured, what they cost, GP-level financing, and where the risks actually sit — SandBridge’s plain-English explainer on fund finance covers the whole stack in one piece, without requiring a law degree to follow.
The takeaway
None of this is scandal — it’s infrastructure, and mostly sensible infrastructure. But “how did this fund actually finance its returns?” has quietly become one of the sharpest due-diligence questions in private markets. The investors who ask it are reading the engine, not the paint.
