• Borrowing against portfolios is preferred to selling at a discount
• Speed of execution, relationship management also key factors
• Family offices, insurers are most proactive users of LP financing

Facing a slowdown in distributions, LPs are increasingly turning to debt as they try to unlock liquidity from their private equity portfolios.

Even as sales of fund positions via the secondary market soar, a growing number of investors are looking to avoid that outcome but retain the end-benefits: securing capital for new fund commitments or portfolio rebalancing. Borrowing against those positions has become a popular alternative.

“The need for liquidity solutions is just much greater in this environment than it was previously,” said Mike Hacker, global head of portfolio finance at Carlyle AlpInvest. “Since 2022, that pressure on LPs has really been a contributor to the growth in LP financing.”

This pressure intensified in 2Q25 as a relatively upbeat mood soured in response to tariff uncertainty, leading to severely curtailed exit activity. Historical fund cash flows suggest distributions to paid-in from 2018-vintage funds in the US and Western Europe should be 0.8x, Bain & Company noted in its private equity mid-year report. The actual figure is about 0.6x.

LPs were already taking the issue into their own hands, with LP-led secondary transaction volume reaching a record USD 87bn in 2024, up from USD 60bn a year earlier, according to Jefferies. It also tracked a continued uptick in pricing. Buyout fund positions were selling for 94% of net asset value (NAV), a three-year high.

“Pricing in the secondaries market is back up to where it was in 2021, which was a period of exuberance, so the benefit of using a loan rather than selling is if LP finds that they must sell at a discount,” said Gerald Cooper, co-head of secondaries advisory at Campbell Lutyens. “Selling at even a 5% discount is a 5% loss that the LP takes on the book.”

Lenders step up

LP financing is described as a specific type of NAV lending. It is distinct from fund-level loans, or NAV loans, which are collateralized by the underlying assets in a fund and often used by GPs to make distributions to LPs or support add-on acquisitions by portfolio companies. 17Capital, best known as a NAV lender, started out in 2009 by making a loan against a fund position to an LP.

Specialist secondaries investors also use fund positions as collateral when buying portfolios or seeking fund finance solutions.

In assessing the merits of a secondary sale versus a financing solution, LPs must consider the longer-term prospects of the underlying assets. A full sale means accepting a discount to NAV; a financing solution comes with a cost of debt, but the LP retains 100% equity exposure and therefore all of the upside.

“They’re betting that the asset, once the market recoups, would exit at a value that will justify the cost of additional cost of financing,” said Patricia Teixeira, a partner in Ropes & Gray’s fund finance group, explaining the rationale for choosing the financing option.

Speed and relationship management are also factors. An LP financing transaction can be completed within weeks, while a secondary sale process may run for months, observed Peter Wright, a director at Hark Capital in New York. If a portfolio of 50 fund positions is being traded, for example, each of the GPs involved would have to sign off on the transfer.

“I think it’s only going to get more and more adopted because people don’t want to go through the conversation with the sponsor [about a traditional portfolio sale],” said Wright.

Sponsors might be concerned about having to deal with new counterparties who turn out to be default risks – because they can’t fund future capital calls – or rivals. Moreover, when the sponsor is raising its next fund, LPs that remain through the life of a fund would be prioritized over those with a history of selling, said market participants.

A deepening pool of lenders has helped the LP financing market develop. A floating rate loan – with a tenor 3-5 years, priced at around 300 basis points over SOFR – is available with a loan-to-value (LTV) of 40%-60%, according to Carlyle AlpInvest’s Hacker. This compares to 10%-20% for a fund-level NAV loan.

LTVs are higher because fund positions are considered robust collateral, market participants say. There is more diversity in the underlying assets than for a traditional NAV loan, which usually only has the portfolio assets associated with one fund. The collateral for LP financing includes many fund positions, each tied to its own portfolio of assets.

In the event of a default, there is none of the complexity associated with having to foreclose on underlying portfolio companies. If an LP defaults on a loan, the fund positions are easy to sell on the secondaries market – and diversification means valuations are relatively stable.

Even in a worst-case scenario like the global financial crisis, funds were only being sold at a 50% discount, according to Cooper of Campbell Lutyens.

“As lenders, [we focus] on supporting diversified, well-performing portfolios managed by institutionalized GPs,” Dane Graham, a partner at 17Capital, said. Underwriting processes emphasize finding ways to maintain strong alignment between the LPs and GPs.

Simplicity is another selling point for LP financing over other solutions. Cooper observed that a collateralized fund obligation (CFO), whereby fund positions are packaged up and sold to a wider variety of investors, could offer higher LTV and lower cost, but it involves more steps. The product must be rated and a liquidity facility put in place prior to launching the sale process.

Preferred equity, meanwhile, is an expensive option. Cooper noted that the cost comes out in the mid-teens versus high single digits for LP financing.

If the solution fits

LP type influences demand in the alternative liquidity space. Family offices and insurance companies are regarded as early adopters of LP financing. For family offices, it is a function of having more flexible mandates but also fewer financing options than institutional players. Insurers, meanwhile, have long been savvy in the use of leverage and securitisation in portfolio management.

The likes of endowments and pension funds are more conservative in their approach, wary of taking on leverage. Banks are the first port of call when they need financing. They would likely only use LP financing because GPs are pushing that solution as part of efforts to get liquidity-starved investors to re-up in the next fund, said one consultant to institutional investors.

“You’re going to get a mixed bag of answers from LPs about how they view this technology,” said Bronwen Jones, a partner at Cadwalader. LPs can vary in risk appetite, and more investors could be open to LP financing solutions if M&A markets do not pick up.

Hacker of Carlyle AlpInvest believes LP financing “could easily become 15% or 20% of the overall secondaries market in the next few years.” This is contingent on LPs becoming more familiar with their options – and on the continued expansion of lenders willing to serve these options. Above all, though, adoption will be driven by an ever more pressing need for liquidity.

“If you have a bunch of cash tied up in long-term, illiquid investments, it can be handy to have a line of credit available to allow you to be nimbler and to make other investments which are more tactical, or shorter term,” said one fund-of-funds investor.