Private Credit Funds in Hong Kong: Legal Framework and Structuring Guide

Introduction

Private credit has emerged as one of the fastest-growing segments of the global alternative asset management industry. Driven by banks’ retreat from leveraged lending following the global financial crisis, the rise of non-bank lenders — direct lending funds, mezzanine funds, distressed debt funds, and special situations vehicles — has fundamentally reshaped the landscape of corporate financing.

Hong Kong, as Asia’s leading financial centre, has become an increasingly important hub for private credit fund formation and deployment, particularly for strategies targeting Greater China and broader Asia-Pacific opportunities. This guide examines the legal framework for private credit funds in Hong Kong, the key structuring considerations, and the regulatory requirements.

What Is Private Credit?

Private credit (also called private debt or alternative lending) refers to debt financing provided by non-bank lenders, typically through privately negotiated loan agreements rather than publicly traded debt instruments. Key private credit strategies include:

• Direct lending: Senior secured loans to mid-market companies, typically as a substitute for bank financing.
• Mezzanine debt: Subordinated debt (or hybrid debt/equity instruments) sitting between senior debt and equity in a capital structure, typically carrying higher yields and often including equity participation (warrants or convertible features).
• Distressed debt: Acquisition of debt of financially stressed or bankrupt companies at a discount, with the aim of recovering more than the purchase price through restructuring or enforcement.
• Real estate debt: Senior or subordinated loans secured by real estate, or acquisition of existing real estate loan portfolios.
• Special situations: Opportunistic credit strategies targeting dislocated markets, complex capital structures, or unique risk/return opportunities.

Fund Structures for Private Credit in Hong Kong

Private credit funds in Hong Kong are typically structured using one of the following vehicles:

Cayman Islands Limited Partnership

The Cayman Islands exempted limited partnership (ELP) remains the dominant vehicle for closed-end private credit funds targeting institutional investors globally. It is familiar to institutional LPs, benefits from a well-established regulatory and legal framework, and offers flexibility in structuring economic terms (management fee, carried interest, hurdle rate, etc.).

Hong Kong Limited Partnership Fund (LPF)

The Limited Partnership Fund (LPF) regime, introduced by the Limited Partnership Fund Ordinance (Cap. 637) in 2020, provides a Hong Kong-domiciled alternative to the Cayman ELP. Key features: a general partner (GP) registered in Hong Kong and responsible for management, one or more limited partners (LPs) with limited liability, a profits tax exemption for qualifying transactions (including debt instruments), and a stamp duty exemption on transfers of interests in the LPF.

The LPF has gained traction, particularly for funds that wish to demonstrate Hong Kong substance or that are established under government grant schemes. Its disadvantage compared to the Cayman ELP is its relative novelty and lower recognition among global institutional LPs.

Open-Ended Fund Company (OFC)

The OFC is a corporate fund vehicle with variable share capital. While more commonly used for liquid strategies (hedge funds, family office vehicles), it can also accommodate closed-end or semi-liquid private credit strategies. OFCs benefit from the same profits tax and stamp duty exemptions as LPFs.

Regulatory Requirements

SFC Licensing

The investment manager of a private credit fund must hold an SFC Type 9 (Asset Management) licence if the fund’s assets include “securities” as defined in the SFO. The key question is whether the debt instruments held by the fund are “securities.”

Under the SFO, “securities” include debentures — defined broadly as instruments acknowledging or creating indebtedness. Publicly traded bonds and notes clearly fall within the definition. However, the SFC has taken the position that privately negotiated bilateral loans (i.e., loans documented by a conventional facility agreement rather than a transferable debt instrument) are not “debentures” and therefore not “securities” for SFO purposes.

This means: a private credit fund that invests exclusively through bilateral loan agreements may not require a Type 9 licence for the management of those loans. However, in practice, most private credit funds also hold some securities (notes, convertible instruments, bonds acquired in the secondary market), so a Type 9 licence is commonly obtained.

If the fund holds real estate (or interests in real estate-owning entities) as part of a real estate debt strategy, a Type 9 licence covering “property” may also be required.

Money Lender Licensing

The Money Lenders Ordinance (Cap. 163) regulates the business of money lending in Hong Kong. A person who lends money at interest in the ordinary course of business is a “money lender” and must hold a money lender’s licence unless exempt. Key exemptions include: licensed banks and deposit-taking companies, and — crucially for private credit funds — lenders whose borrowers are corporations and whose lending activities are not directed at the public.

Private credit funds lending exclusively to corporate borrowers (not individuals) in Hong Kong are generally exempt from money lender licensing requirements. However, funds that lend to individuals, or whose lending is structured in a way that resembles retail lending, should take specific legal advice.

AML/CFT Compliance

Private credit fund managers that are SFC-licensed must comply with AMLO AML/CFT requirements. Non-licensed managers (managing purely loan portfolios) are not directly regulated by the SFC or HKMA but should maintain robust AML/CFT policies as a matter of good practice and to satisfy investor due diligence requirements.

Key Documentation

The core documents for a Hong Kong private credit fund include:

• Limited Partnership Agreement (LPA) or OFC Prospectus: The constitutional document governing the fund’s structure, terms, governance, and economics.
• Private Placement Memorandum (PPM): The investor disclosure document describing the fund’s strategy, terms, risks, and service providers.
• Investment Management Agreement (IMA): The agreement between the fund and the investment manager governing the management mandate, fees, and obligations.
• Loan Agreements: The bilateral facility agreements (and ancillary security documents) governing the fund’s lending activities. These are the primary commercial contracts of a direct lending fund.
• Subscription Agreement: The agreement between the fund and each investor governing the investor’s commitment, representations, and eligibility.

Tax Considerations

Private credit funds structured as LPFs or OFCs benefit from a profits tax exemption on qualifying transactions, including income from “debt instruments” (a defined category under the Inland Revenue Ordinance). Interest income from qualifying debt instruments held by the fund is therefore exempt from Hong Kong profits tax at the fund level.

However, income from loans that do not qualify as “debt instruments” (in particular, bilateral loans not documented as transferable instruments) may not fall within the exemption. Tax structuring advice from Hong Kong tax counsel is essential at the fund formation stage.

Conclusion

Hong Kong’s legal and regulatory framework for private credit funds is well-developed and supportive of fund formation and management. The LPF and OFC structures offer Hong Kong-domiciled alternatives to offshore vehicles, with meaningful tax concessions and a credible regulatory environment. The key regulatory questions — SFC licensing and money lender exemption — require careful analysis based on the specific strategy of the fund.

Alan Wong LLP advises private credit fund managers on fund formation, SFC licensing, investment documentation, and regulatory compliance in Hong Kong. Contact us to discuss your private credit fund needs.