The fund ​finance market surpassed $1 trillion in size this ⁠year, driven by demand from the growing private credit market, according to a new Moody's Ratings report.

Once an early-stage liquidity option for ‌private funds, the fund finance market has become a "critical backstop" for private credit lenders as they ‌have opened more funds in recent years, Moody's ‌analysts ⁠wrote.

Private credit funds have also become key ⁠players both as borrower and lender in net asset value (NAV) loans, which are backed by a fund's underlying investments, Moody's noted. NAV facilities offer ​longer tenors and more ‌flexible underwriting, offering higher returns in exchange for the greater risk tied to the underlying loan investments.

The fund finance market has also seen a growth in ‌hybrid structures that are secured by both NAV and ​investor commitments.

The Moody's analysts raised concerns about the recent AI disruption of software companies, and the ⁠subsequent elevated investor withdrawals from private credit funds invested in software businesses.

"Asset quality in US direct lending is weakening, ‌and growing disruption from artificial intelligence is introducing additional stress, particularly on software companies," the analysts wrote.

Moody's also highlighted the exposure of these NAV facilities to payment-in-kind (PIK) loans, which allow borrowers to defer interest payments and instead increase the principal due at maturity.

"As private market fund investors are ‌becoming more accepting of fund-level leverage, the rise of private credit ​and fund finance are mutually reinforcing," the report's authors wrote.

"As the market expands, however, it has ⁠become essential for private credit fund managers to maintain prudent ⁠underwriting discipline and to rigorously stress-test leverage-on-leverage structures," they added.

Banks, which also lend NAV facilities, have begun ‌bundling these loans into asset-backed securities to transfer risk and tap capital markets to deepen the investor base ​for these loans, the report noted.

Published on April 28, 2026