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14 Apr 2026

Liquidity under pressure

Fund strategy in a higher-rate environment

7 minute read time

With interest rates persistently higher in many markets, private funds are rethinking liquidity management to support portfolio resilience and capital deployment.

While capital availability remains relatively abundant, rising debt costs have become a larger consideration in fund structuring as higher interest rates reduce the level of borrowing that assets can support.

This has put pressure on investment margins and increased the importance of strong, predictable cash flows to meet debt servicing needs.

For fund managers, this environment is prompting a reassessment not only of financing tools, but also of portfolio pacing, distribution policy and investor communication. Liquidity strategy is increasingly a core driver of fund resilience rather than a tactical, deal-by-deal consideration.

Managers and lenders are increasingly adopting more conservative capital structures. They are using tighter covenant protections and greater use of hedging to manage rate volatility and to ensure transactions remain resilient over longer investment horizons.

Lenders have also adjusted their approach in response to the new higher-rate norms. They are increasingly requiring more granular cash-flow analysis, sensitivity testing around interest-rate paths, and modelling of downside scenarios to ensure funds can withstand prolonged periods of elevated borrowing costs.

Higher interest rates have also placed a stronger emphasis on valuation discipline, as increased discount rates and financing costs raise return thresholds and place greater attention on underlying cash-flow assumptions.

At the same time, LPs are calling for greater transparency into how valuations are determined, how debt costs affect projected returns, and how portfolios are positioned to withstand a prolonged higher-rate environment.

Net Asset Value (NAV) facilities and continuation vehicles have become popular tools to unlock liquidity and support growth and reinvestment – and managers have found that these can also help offset the refinancing risks and funding gaps caused by tighter cash flows.

Bryan Fashola, Institutional Banking Director at RBS International, says: 'There’s still plenty of liquidity out there from a lending perspective, but higher rates mean that lenders will pay close attention to how facilities are structured.'

'In this environment, if your investment strategy doesn't provide relatively good yields, ideally significantly above benchmark rates, then ultimately you might end up being constrained from an investment perspective and LPs might be less likely to invest.'

‘Yield continues to be a central consideration for LPs, meaning that in a higher rate environment, fund managers must explicitly factor in the level of return necessary to attract and retain investor capital during fund structuring.'

Lenders and managers are also placing greater emphasis on resilience under stressed rate scenarios. As a result, transactions are increasingly being structured with lower leverage, stronger cash-flow coverage and tighter terms to ensure financing remains robust over the life of the investment.

Investors’ flight to quality

Changes in capital structure and lender behaviour are leading to adjustments in deal terms to provide greater resilience against earnings volatility.

Covenant packages may have thresholds set more conservatively to trigger earlier engagement if performance weakens.

There is a heightened focus on hedging strategies at both the asset and fund levels, as lenders seek to mitigate interest rate risk and promote greater cash flow certainty.

This has driven a flight to quality, with capital gravitating towards established managers with strong track records and making LPs less likely to commit to funds that cannot demonstrate the potential to deliver attractive risk-adjusted returns.

LPs are experiencing their own liquidity constraints, leading to slower deployment, more cautious commitment pacing and an increased focus on the secondary market.

Secondaries have become more strategic, providing LPs with a means to actively manage liquidity, reduce exposure to older vintages and recycle capital into higher-conviction opportunities.

LPs are increasingly looking for greater visibility on near-term distributions before deploying additional capital.

For fund managers, this shift is translating into heightened scrutiny around near-term distributions, leverage discipline and downside protection. Funds that can articulate credible cash-yield pathways and demonstrate resilience under stressed rate scenarios are more likely to sustain investor momentum.

Spence Clunie, Managing Partner at infrastructure investment firm Ancala says: “There’s been a move by some investors towards looking for a slightly higher return, given the higher interest-rate environment. If a fund was only delivering a single-digit return, investors are now saying the premium to the risk-free rate isn’t sufficient. They need a bigger spread.”

But, he says, the fundamentals of infrastructure investing continue to be attractive to LPs and it hasn’t changed the way Ancala approaches holding periods and refinancing risks.

“From our point of view, I don't think the change in interest rates has changed the timing of exits,” he says. “Our strategy is to find infrastructure assets that have downside protection, inflation linkage and strong cash yield.

“We've always been focused on improving that return during our hold period so when we're coming to exit, we have an attractive asset for a wide range of potential investors.”

He adds: “When rates went up, we always believed it wouldn’t be a temporary increase. We planned on that basis with low leverage and, given that we have conservative valuations, when we've come to exit, we've managed to do so at a premium to our internal valuations pretty consistently.”

He explains that interest rate hedging, foreign exchange hedging, commodity price hedging, CapEx facilities and working capital facilities have all helped Ancala to manage liquidity and de-risk its portfolio.

Balancing asset-level optimisation with fund-level liquidity

One of the defining challenges for fund managers in the current environment is balancing asset-level value optimisation with fund-level liquidity requirements.

While many assets continue to deliver attractive yield, decisions around hold periods are increasingly influenced by distribution expectations, refinancing profiles and overall portfolio liquidity rather than exit timing alone.

Tools such as NAV facilities, continuation vehicles and secondaries are playing a growing role in bridging this gap. When used selectively, they can provide flexibility to support follow-on investment, manage delayed exits or smooth distribution profiles without forcing asset sales at suboptimal valuations.

Increasingly, managers are sequencing refinancings, partial realisations and capital recycling strategies at a portfolio level to balance yield, liquidity and long-term value creation.

NAV facilities now firmly mainstream

Continuation vehicles, capital recycling and NAV-based facilities have become a popular and effective way to unlock liquidity from portfolios.

These tools provide liquidity buffers that allow funds to support follow-on investments, bridge delayed exits or manage refinancing cycles. However, their use requires disciplined structuring, clear governance and transparency with investors around valuation and potential conflicts.

As NAV facilities have become more widely adopted, governance standards and investor communication have taken on greater importance. Managers are increasingly focused on ensuring that facility structures, valuation methodologies and distribution outcomes remain aligned with long-term fund objectives.

David Harding, Managing Director of Funds Finance at Equitix, highlights that NAV facilities are moving to more mainstream components of infrastructure fund management.

“These facilities provide speed, flexibility, and a lower overall cost of capital, helping to deploy capital efficiently into investments and building diversified portfolios,” he says.

“Asset Managers have generally been pushed to defer exits to realise value through yield and inflation linkage rather than a near-term sale, but our strategy has always been to hold assets for the longer term.

“Because of heightened volatility in recent years, there’s a drive to consider refinancing earlier and to hedge exposures further – but it’s more about managing the volatility than reacting to rates alone. From an equity perspective, we do look for opportunistic exits for the benefit of our investors, but our investment strategy is typically to hold assets. We're not being pushed to any change of strategy.”

David points out that the higher rate environment has altered LP dynamics, as investor priorities shift.

He says: “Clearly in a higher interest rate environment, investor return requirements have increased. It is our responsibility to ensure that the investment policy and the structure of our funds evolve accordingly.”

“With that in mind, later vintage vehicles have a higher return target than those from say 2018–2019.”

He adds: “We view this as an opportunistic market. There is a desire in the market to realise assets to generate liquidity and defend NAVs, and for any player that has capital, that's an opportunity.”

What resilient fund strategies increasingly have in common

Taken together, these trends suggest a structural shift rather than a temporary cycle. In a higher rate world, resilient fund strategies are increasingly characterised by conservative leverage, proactive refinancing, embedded hedging and disciplined liquidity management.

Liquidity strategy is playing an increasingly central role in fund resilience and investor confidence. In response, many managers are reassessing refinancing risk by stress testing debt structures and NAV facilities against tighter cash flows and delayed exits; better aligning distribution pacing with portfolio liquidity; strengthening downside protection through lower leverage, stronger cashflow coverage and more comprehensive hedging at both asset and fund level; and using liquidity tools more strategically—including NAV facilities, continuation vehicles and secondaries—to bridge funding gaps without forcing asset sales at suboptimal valuations.

Enhancing investor communication also remains key and fund managers that can clearly articulate how yield, liquidity and exit strategies interact – and demonstrate transparent resilient valuations under stressed scenarios – are better positioned to maintain investor confidence and deploy capital effectively.

RBS International continuously monitors topics that affect our customers. Contact your relationship team if you wish to discuss how we can further support your business.

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Liquidity under pressure

7 minute read time

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