A quiet but consequential shift is taking place inside the $1.7 trillion private credit market. Increasingly, private credit funds are not just lending to corporations — they are lending to one another, creating layered webs of leverage that regulators and analysts warn could amplify losses during a downturn. The practice, sometimes called “fund finance” or “NAV lending,” allows funds to borrow against the net asset value of their portfolios, often to deploy fresh capital or meet investor redemptions without selling positions at a discount.
The trend has accelerated sharply since 2022, as rising interest rates pushed traditional bank lenders to the sidelines and institutional investors poured record capital into private credit vehicles. According to analysis cited by the Financial Times, NAV-based lending to private funds grew by an estimated 40 percent in 2023 alone, with total fund finance facilities now thought to exceed $100 billion globally. Major managers including Blue Owl Capital, Ares Management, and Apollo Global have all expanded their fund finance capabilities in recent quarters.
The concern for regulators is straightforward: when one leveraged vehicle lends to another leveraged vehicle, the system’s true exposure becomes difficult to map. The Federal Reserve’s most recent Financial Stability Report flagged private credit interconnectedness as an emerging vulnerability, noting that opacity in fund-to-fund lending obscures aggregate leverage ratios across the sector. The Securities and Exchange Commission has separately proposed rules requiring greater disclosure of leverage usage by registered investment advisers, a measure the industry has partly resisted. Details of the proposal are available on the SEC’s official rulemaking page.
Critics argue the structure creates dangerous feedback loops. If asset valuations fall and borrowing funds face margin-like pressures, they may be forced to sell illiquid holdings at steep discounts — precisely the scenario private credit was designed to avoid by staying off public markets. “You have leverage on leverage, and nobody has a clean view of where the risk actually sits,” one senior risk officer at a European asset manager told The Fiscalist, speaking on condition of anonymity. Bloomberg has reported that some funds now carry effective leverage ratios exceeding 2x when fund-level borrowing is included alongside underlying portfolio company debt.
Supporters of the practice counter that NAV facilities are typically conservative, carrying loan-to-value ratios of 15 to 25 percent, and that they provide genuine liquidity management benefits. They also note that private credit has so far recorded historically low default rates compared with broadly syndicated loans. For a broader look at structural shifts reshaping alternative finance, we explored these dynamics in an earlier piece on economics and finance trends and insights.
Regulators on both sides of the Atlantic appear unconvinced by industry reassurances. The Bank of England’s Financial Policy Committee raised similar concerns in its June 2024 review, and the Financial Stability Board has placed private credit oversight on its 2025 work agenda. Reuters reported that coordinated international guidance on fund finance disclosure could be finalized before year-end. Whether voluntary transparency measures will satisfy watchdogs — or whether binding rules follow — may define the next chapter for one of finance’s fastest-growing corners. For context on how broader leverage trends connect to wealth concentration dynamics, we examined these connections in our report on the latest trends in economics and finance.