Promises on demand

Keeping investors in a fund for years does not ensure that money will be there when a borrower calls. A private-credit fund may have promised a company additional financing while relying on a bank to supply its own cash. The two commitments can behave very differently when the company's finances weaken.

The IMF’s October Global Financial Stability Report examines this gap in direct lending. Borrowers may draw promised funds just as deteriorating collateral reduces the lender’s access to bank credit. The question reaches beyond investor withdrawals: how much cash has a fund promised to companies, and how much of its own financing would remain available when those promises are exercised?

Some default measures have improved, according to the IMF’s broader assessment. That can coexist with a liquidity problem. A borrower may still be making interest payments while drawing additional credit, and a fund may have valuable loans on its books without enough immediately usable cash to meet those requests.

The other queue

A direct-lending package can include a term loan advanced at closing, a revolving credit line and a delayed-draw term loan. The latter commitments reserve access to money that has not yet changed hands. A borrower may draw when sales falter or simply to build a precautionary cash buffer. Several borrowers responding to the same downturn can turn a set of unused promises into simultaneous demands.

Investor withdrawals follow different contracts. Some private funds lock capital away; others permit periodic, restricted repurchases. FINRA explains that interval funds offer repurchases at specified intervals rather than daily redemption, and requests may exceed the amount accepted. These limits match investors’ access to a portfolio that cannot readily be sold. They leave the fund’s separate commitments to corporate borrowers intact.

An investor agreeing to wait and a company entitled to draw a credit line occupy opposite sides of the fund. Extending the first agreement does not automatically change the second. A liquidity assessment therefore has to put both on a calendar: when investors may request money, when borrowers can demand it, and which receipts will be available to meet either claim.

A credit line is not cash

Funds often obtain bank financing against their loan portfolios. Under the asset-based facilities examined by the IMF, collateral eligibility, valuation discounts and concentration limits determine a “borrowing base”. This sets how much debt the assets will support. The unused contractual commitment can therefore exceed the amount the fund is actually permitted to borrow.

When collateral deteriorates, the borrowing base can shrink below the amount already drawn. The IMF explains that a fund may then need to supply cash or additional eligible collateral; an uncured deficiency can trigger default under the bank facility and suspend further borrowing. That contractual failure is distinct from a portfolio company missing an interest payment. The pressure can arise while a fund is still collecting income.

The important disclosure is consequently the gap between money promised and money accessible. Reporting an undrawn line without its collateral conditions leaves that gap hidden. The fund must also distinguish assets already pledged to one lender from resources it can use elsewhere. Counting the same support against several commitments would make the apparent liquidity buffer larger than the cash it can deliver.

Watch the receipt

A study published by the Federal Reserve Bank of Boston in August adds a reason to examine those receipts. Its authors found increasing use of payment-in-kind interest in business development company portfolios: interest is added to the debt instead of paid in cash. This can be part of the original financing arrangement or provide relief to a struggling borrower. Either way, the lender waits longer for the money.

Accrued interest may contribute to reported income while supplying no cash for a new loan drawdown. The practical question is how the fund bridges that interval: existing cash, repayments from other borrowers or financing it can still use. Adding interest to principal increases the claim on the borrower; it does not provide money with which to fulfil another promise today.

The Boston findings come from disclosed BDC portfolios, which offer a view into a market where many vehicles publish much less information. They cannot establish the cash position of every private-credit fund. Nor can a reported loan value settle what a sale would raise or how quickly it could be completed. Those are separate questions for a liquidity assessment.

Research published by the Federal Reserve Board in May 2025 found limited direct threats to bank solvency and liquidity in the exposures studied, while identifying possible simultaneous drawdowns by non-bank borrowers. That historical finding distinguishes a fund’s financing problem from a banking crisis. It also identifies the next link to examine when funds approach their banks together.

The IMF’s warning is thus a question about enforceable access to cash. Long-lived capital can support long-lived loans, but unfunded commitments require a separate provision for liquidity. A fund has earned the description “patient” only if the financing behind its patience can survive the moment its borrowers stop waiting.