I often say the $1 trillion fund finance market is the biggest asset class you've never heard of.¹ It’s obscure, even for the institutional investors who may be familiar with private markets. 

That’s a shame because sub-line loans – one corner of the fund finance world – can deliver investors an extra two percentage points without taking on additional credit risk. They also offer a stable investment-grade asset with low correlation to other asset classes, even with other private market assets.

That’s nothing to sniff at in this uncertain world, amid almost daily shocks from the US, shaky stock markets, and bond investors looking for clarity on the direction of inflation and interest rates.

Understanding sub-lines

Subscription-line facilities are a type of financing used by private market funds, including private equity, private credit, infrastructure, and real estate funds. They are essentially short-term loans that allow the managers of these funds to quickly access cash to make investments without having to call on capital commitments from investors immediately.

Lenders are usually banks. However, some asset managers, including ourselves, have developed the expertise to make these loans for the benefit of our clients, such as insurers, pension schemes, and sovereign wealth funds.

Sub-lines are considered low risk. They are senior loans secured against the uncalled investor commitments in a fund – a diversified collateral pool that over time has proven to be a low default risk.

Why borrowers pay more

Borrowers pay more for two reasons:

Middle market sweet spot

The best opportunities right now are found in the middle market. Sub-line loans are made to sponsors who invest in middle-market companies with annual revenues between $10 million and $1 billion. These sponsors are usually smaller than the household names but are still high-quality borrowers with outstanding track records.

The key thing to understand is that the risk can be the same as lending to the big names. However, there isn’t as much competition to lend to these smaller borrowers, so loan pricing can still look attractive for lenders.

Moving into the middle market, we’ve found that lenders can receive as much as 50 bps more than servicing the biggest borrowers, who can use their size to secure cheaper loans.

But why now?

Getting price data for private markets isn’t easy. Based on our own experience, illiquidity premia are at very attractive levels compared to the historical average. For fund finance in general, the average yield spread – or difference – between comparable private and public market debt was some 94 bps during the six-year period to end-2024. Last year, this spread reached 173 bps on certain transactions.²

The absolute return for a sub-line investor can be between 185 bps and 300 bps more than floating-rate benchmarks, including the Sterling Overnight Index Average (SONIA), the Secured Overnight Financing Rate (SOFR), and the Euro Interbank Offered Rate (Euribor).^3,4,5

As a rough guide, SOFR – a gauge of the cost of borrowing US dollars overnight – was 4.34% on March 28.⁶ Adding a conservative 185 bps to this translates into a return of more than 6%.

¹ Preqin, February 2025.
² Aberdeen, December 2024.
³ Sterling Overnight Index Average (SONIA) is a benchmark interest rate in the UK, administered by the Bank of England. It reflects the average interest rates that banks pay to borrow sterling overnight from other financial institutions and institutional investors.
⁴ The Secured Overnight Financing Rate (SOFR) is a benchmark rate that reflects the cost of borrowing overnight, backed by U.S. Treasury securities in the repo market.
⁵ Euro Interbank Offered Rate (Euribor) is an interest rate benchmark for the eurozone, calculated using the average rates that eurozone banks offer each other on unsecured short-term loans of various maturities.
⁶ SOFR interest rate. Global-rates.com, March 2025. https://www.global-rates.com/en/interest-rates/sofr/.

Important information

Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.

Among the risks presented by private equity investing are substantial commitment requirements, credit risk, lack of liquidity, fees associated with investing, lack of control over investments and or governance, investment risks, leverage and tax considerations. Private equity investments can also be affected by environmental conditions / events, political and economic developments, taxes and other government regulations.

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