Separately managed accounts have become a key source of capital for private market managers, and lenders are adapting underwriting techniques and strategies to adjust to this growing channel
In today’s challenging fundraising market, separately managed accounts (SMAs) are providing managers with a crucial source of capital. In turn, lenders are evolving to support this fast-growing market.
Although it is difficult to track the formation of SMAs (bespoke portfolios of assets curated for sovereign, institutional, or high-net worth clients) given that these arrangements are bilateral and private, industry watchers broadly acknowledge that more investors are establishing SMAs to leverage long-standing relationships with managers and to increase their exposure to areas like co-investment, private credit and secondaries.
At a challenging point in the fundraising cycle for flagship funds (according to PEI, private equity fundraising fell by 17% year-on-year in H1 2025 to US$384 billion, the weakest first half since the pandemic), SMA inflows have become a key fundraising channel for managers. Firms can close SMA vehicles within shorter timeframes, focusing negotiations on one counterparty rather than having to corral large groups of investors over protracted periods when raising conventional pooled funds.
For lenders, the growth of SMAs has added additional layers of complexity. For instance, lenders must adapt their underwriting approaches to the different risk profiles presented by SMA structures.
When lending to managers running traditional closed-end funds with a large number of investors, subscription facilities are “cross-collateralized” against a diversified borrowing base. In contrast, in an SMA context, lenders do not benefit from the same level of risk diversification, as loans are exposed to the commitment of one LP. Thus, if for whatever reason this single investor stops funding a commitment to an SMA, the recourse for the lender is not the same as it is in a fund with a diversified borrowing base, where the commitments of other investors can provide cover if one LP fails to meet a fund commitment.
Adapting underwriting
Although SMA vehicles are backed by a single investor, the cash-flow patterns of the SMA will mirror those of a conventional fund, and managers and LPs will still expect to have a subscription facility in place to maximize the structure’s capital efficiency. Lenders, accordingly, have had to adapt financing to the increasing number of SMAs.
The strategic importance of fund finance has intensified in recent years. Weak exit volumes in flat M&A and IPO markets have seen distributions to LPs fall to historical lows. Fund finance instruments have enabled GPs to reduce capital calls to liquidity-sensitive LPs, helped finance GP commitments, supported fundraises between the first and second close, and allowed managers to extend the hold periods of portfolio companies that require further capital injections.
To provide subscription facilities to SMAs, lenders have had to rethink their approaches to underwriting and factor in the single-LP risk profile of an SMA.
When providing finance to an SMA, lenders have managed the different risk profiles by using investor consent letters from the LP behind the SMA. These consent letters—which are not often required in flagship funds with multiple investors (anymore)—entail the LP entering into a separate agreement with the lender.
The letter will, among other things, acknowledge the LP’s commitments to the SMA and specify the ability of the lender to enforce their security interest (i.e., the right to call capital) from the LP directly under certain scenarios (i.e., an event of default). Investor consent letters will also address any areas of concern that the lender may have with respect to shortfalls in the LP agreement, side letters or otherwise in the fund documentation, as they pertain to the subscription facility.
Lenders will also conduct detailed credit assessments of SMA investors, with pricing and terms shifting depending on the LP in question. For example, large sovereign wealth funds have employed SMA arrangements for many years and have worked with lenders on multiple occasions. These regular users present reduced credit risk and are increasingly able to negotiate more favorable terms for investor consent letters, reflecting their strong track record and increased understanding of the market. By contrast, LPs who are newer to the SMA space may carry higher credit risk. As a result, they are less likely to secure the most advantageous terms from lenders.
Boosting fund finance growth
The increasing use of fund finance in SMA structures is yet another driver for a market that has seen a surge in growth in recent years. Indeed, it is still on an upward trajectory, with more managers from a wider spread of private markets asset classes tapping into the fund finance industry.
Fund finance is now being used regularly to support capital-intensive infrastructure and real estate projects, boosting fund finance activity, which has also benefited from a significant increase in the use of NAV facilities across all private markets assets strategies. Ares Management estimates that the market will be worth US$2.5 trillion within the next few years.
SMA fund finance will contribute to this expansion. Lenders will have to take a diligent approach to fund documentation and the drafting of investor consent letters to ensure that loans are fully covered when an LP defaults on a fund commitment.
However, lenders with solid documentation in place will be well placed to grow their platforms by financing this expanding part of the market.
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