Private Credit Fund Structure: Lending Vehicle Design and Regulation

Private credit has become the fastest-growing segment of alternative investments, with global AUM exceeding USD 1.7 trillion in 2026. The asset class — encompassing direct lending, mezzanine debt, distressed credit, specialty finance, and asset-backed lending — fills the gap left by banks retreating from middle-market lending under Basel III and IV capital requirements. Structuring a private credit fund requires careful attention to lending licence requirements, fund vehicle design, leverage mechanics, and investor protections.

Why Private Credit Has Grown

Several structural factors have driven growth:

• Bank retreat: Basel III/IV risk-weighted capital requirements have made middle-market lending (loans of USD 10 million to USD 500 million) uneconomical for regulated banks. The capital charge on corporate loans incentivises banks to focus on investment-grade borrowers and syndicated facilities
• Yield premium: Private credit funds earn 200 to 600 basis points above broadly syndicated loans, compensating for illiquidity and credit risk
• Floating rate: Most private credit is floating-rate (SOFR + spread), providing natural inflation protection
• Control: Direct lenders negotiate bespoke covenants and structural protections that are absent from covenant-lite syndicated loans

Fund Vehicle Options

Closed-End Fund

The dominant structure for private credit:

• Term: 5 to 8 years with 1 to 2 year extensions
• Capital calls: Drawn down over 2 to 3 years as loans are originated
• Distributions: As loans are repaid or refinanced
• Domicile: Cayman Islands exempted limited partnership or Luxembourg SCSp/RAIF

Evergreen / Open-End Fund

Gaining traction for larger platforms:

• No fixed term: The fund accepts new subscriptions and processes redemptions on a periodic basis (quarterly, with lock-up)
• Advantages: Avoids the J-curve effect (investors are immediately invested), maintains consistent portfolio size, and generates steady management fees
• Challenges: Liquidity management — the fund must maintain sufficient cash or undrawn credit to meet redemptions while keeping the portfolio fully invested
• Domicile: Cayman exempted company, Luxembourg RAIF, or Ireland ICAV

Separately Managed Account (SMA)

For large institutional investors (USD 100 million+):

• Bespoke: Investment guidelines, leverage, and sector focus customised for the investor
• Transparency: Full portfolio visibility and reporting
• Cost: Lower fees than commingled funds (typically 0.75% to 1.25% management fee, 10% to 15% performance fee)

Lending Licence Requirements

The critical structural question for private credit funds is whether the fund vehicle or its manager requires a banking or lending licence to originate loans.

European Union

Under national laws in many EU member states, loan origination by funds is restricted:

• Germany: Only licensed credit institutions (Kreditinstitute) may originate loans on a commercial basis. Funds can purchase loans on the secondary market but direct origination requires a BaFin banking licence or the use of a fronting bank
• France: The Societe de Financement framework (since 2014) allows licensed entities to originate loans. AIFs can originate loans under certain conditions, subject to AMF and ACPR oversight
• Luxembourg: The CSSF permits Luxembourg AIFs to originate loans, subject to risk management and diversification requirements. Luxembourg is the most fund-friendly jurisdiction for loan origination in Europe
• Ireland: The Central Bank of Ireland permits Irish AIFs (QIAIFs) to originate loans, subject to leverage limits (typically 200% of NAV) and diversification requirements

The proposed EU Loan Origination Directive (part of the AIFMD II reforms) will harmonise loan origination rules across the EU, introducing leverage limits and risk retention requirements for loan-originating AIFs.

United States

US private credit funds generally do not require a banking licence to originate loans. The exemption from the Securities Act and the Investment Company Act (through Section 3(c)(1) or 3(c)(7) exemptions) allows private funds to engage in lending activity. However:

• State lending licences: Some states require lending licences for loan origination, particularly for consumer lending (which is outside typical private credit fund scope)
• CFTC/SEC: If the fund uses swaps or derivatives as part of its strategy, additional registration obligations may apply
• Risk retention: Under Dodd-Frank risk retention rules, the sponsor of a CLO or securitisation must retain at least 5% of the credit risk

Cayman Islands

Cayman funds can originate loans without a banking licence, provided they do not accept deposits from the public. The Mutual Funds Act and the Securities Investment Business Act govern the fund and manager respectively. Cayman is the most permissive major jurisdiction for credit fund loan origination.

Leverage

Private credit funds use leverage to enhance returns:

Fund-Level Leverage

• Subscription credit facility: Secured against LP commitments, used to bridge between capital calls. Typically 15% to 25% of committed capital. Interest: SOFR + 150 to 250 bps
• NAV facility: Secured against the fund's loan portfolio. Leverage of 0.5x to 1.5x equity. Provided by banks or insurance companies

Asset-Level Leverage

• CLO (Collateralised Loan Obligation): The fund packages its loans into a CLO, selling senior tranches to institutional investors and retaining the equity tranche. Effective leverage of 5x to 10x on the equity
• Warehouse facility: A revolving credit facility secured against the loan portfolio, used to originate loans before securitisation. Advance rates: 60% to 80% of portfolio value
• Total return swap: A synthetic leverage arrangement where a bank provides financing against the loan portfolio

Leverage Limits

• AIFMD imposes reporting obligations for AIFMs that use leverage; specific limits may be imposed by national regulators
• Luxembourg QIAIFs: The CSSF typically limits leverage to 200% of NAV for loan-originating funds
• Irish QIAIFs: Similar 200% NAV leverage limit applies

Fee Structure

• Management fee: 1.0% to 1.75% of committed capital (commitment period) or invested capital (post-commitment)
• Performance fee: 10% to 20% of net profits above a preferred return (typically 6% to 8% IRR)
• Waterfall: European (whole-fund) preferred by institutional LPs
• Origination fees: 1% to 3% of loan principal, earned by the fund (not the manager) when loans are originated. These fees enhance fund-level returns

Key Takeaways

• Private credit AUM exceeds USD 1.7 trillion globally, driven by bank retreat from middle-market lending under Basel III/IV
• Closed-end fund structures dominate, with 5 to 8-year terms and capital call mechanics, though evergreen vehicles are gaining institutional acceptance
• Lending licence requirements vary dramatically: Luxembourg and Cayman permit fund-level loan origination freely; Germany requires a banking licence or fronting bank arrangement
• Leverage ranges from 0.5x (conservative direct lending) to 10x (CLO equity), with AIFMD and national regulators imposing limits of 200% of NAV for EU loan-originating funds
• Fee structures have compressed: 1.0% to 1.5% management fee and 10% to 15% performance fee are now common for institutional mandates
• The proposed EU Loan Origination Directive will harmonise rules across the EU, introducing leverage limits and risk retention requirements