Alternative Investment Funds (AIFs) provide an option to invest in different asset classes − such as venture capital, private credit, and hedge funds − primarily for Limited Partners (LPs) that are typically large pension funds, endowments, and family offices. The trend toward fund financing for AIFs, where a lender takes risk against the uncalled capital of the underlying investors, has become popular since it can help aid a fund's liquidity and boost the Internal Rate of Return (IRR).

Fund financing continues to grow in popularity. It is especially attractive in today’s environment as funds actively seek liquidity due to the economic slowdown caused by the COVID-19 pandemic and lenders look to enhance yield given low interest rates. Fund financing methods include subscription-line facilities, Net Asset Value (NAV) or asset-backed facilities, and a range of other structures at the fund level. This increased leverage within the AIF universe poses potential credit risks to various lenders to the funds.

This case study looks at how to enable the credit risk and fund finance teams at financial institutions and other lending organizations to assess the creditworthiness of AIFs.