LPs looking for alternative options in a liquidity-constrained market are increasingly pledging their interests in private funds to secure financing from traditional banks and private credit lenders. Using LP interests in private funds as collateral creates certain challenges, however, including how to value the interests on an ongoing basis, how to handle periodic distributions from underlying funds and how to obtain consent from underlying GPs to potential transfers to lenders in an event of default. Before LPs can reap the benefits of this relatively nascent form of liquidity, they need to work with lenders to overcome those and other issues when negotiating the financing agreements. This second article in a two-part series delves into certain challenges that LP portfolio financing facilities pose, including dealing with distributions and valuations in the context of the loan-to-value ratio and how to ensure lenders are protected in event of default scenarios. The first article explored the trends driving the growing use of LP portfolio financing facilities; described the types of LPs and lenders pursuing the facilities; and detailed certain key terms and conditions the parties negotiate when putting the facilities in place. See “Trends in Fund Finance Market and Key Terms Reflect Increased Diversification and Industry Adoption” (May 14, 2026).