Direct Lending Funds: How Non-Bank Lenders Structure Their Vehicles
Direct lending has moved from a niche corner of finance to a core allocation for pension funds, insurers and family offices. As banks tighten balance sheets, non- bank lenders now fill much of the financing gap for mid market companies, sponsors and real assets across Asia. Behind every direct lending fund sits a deliberate structure: a fund vehicle to pool capital, often one or more lending vehicles to hold the loans, and financing arrangements that amplify returns. This guide explains how those layers fit together and where a Hong Kong Limited Partnership Fund (“LPF”) fits in.
What Makes a Direct Lending Fund Different
A direct lending fund originates and holds loans itself, rather than buying bonds or syndicated loans in the market. The manager negotiates terms directly with the borrower, sets covenants and takes security. That creates a very different operational profile from an equity fund.
Income is contractual. Returns come mainly from interest and fees, so cash flows are regular and predictable.
Capital is deployed and returned gradually. Loans are drawn over time and repaid in instalments or at maturity.
Security matters. The vehicle that holds the loan must be able to take and enforce security over the borrower’s assets.
Location of the lender matters. Where the lending entity sits affects licensing, withholding tax and enforcement.
Because of these features, the question is rarely just “which fund?” It is which fund, which lending vehicle, and how they connect.
The Typical Layers in a Direct Lending Structure
Most direct lending platforms are built in three layers. Each has a distinct job.
The Fund Vehicle
The fund is where investors commit capital and where the economic terms live. It is usually a limited partnership, with a general partner (“GP”) that will manage the fund and sign documents on its behalf, and limited partners (“LPs”) who provide capital but take no part in day to day management. The fund’s governing document sets the commitment period, capital call mechanics, distribution waterfall and fees.
The Lending Vehicle
Many managers do not lend directly from the fund. Instead, the fund owns one or more special purpose vehicles that originate or hold the loans. This allows the manager to:
ring fence individual loans or portfolios from one another
choose a lending jurisdiction suited to a particular borrower
grant security to a leverage provider over a defined pool of assets
bring in coinvestors at the asset level without changing the main fund
Our guide on SPV vs fund structures explains how these two layers interact in more detail.
The Financing Layer
Direct lending funds commonly use leverage. A subscription line bridges capital calls in the early years. An asset backed facility at the SPV level borrows against the loan portfolio itself. The structure must be designed so lenders to the fund can take the security they need without compromising the rights of investors.
Comparing Common Direct Lending Vehicle Structures
Different strategies call for different architectures. The table below sets out the structures non bank lenders use most often.
Structure | How it works | Best suited to |
Single fund, direct lending | The fund itself originates and holds loans | Smaller funds with a simple, single jurisdiction strategy |
Fund with lending SPVs | The fund holds loans through one or more wholly owned SPVs | Multi jurisdiction lending, asset level leverage, ring fencing |
Master feeder | Feeder funds pool different investor groups into one master fund that lends | Managers raising from investors with different tax or regulatory needs |
Parallel funds | Two or more funds invest side by side on the same terms | Investors who need a different vehicle or jurisdiction |
Separately managed account | A single investor’s capital is managed in its own vehicle | Large institutions seeking bespoke terms and control |
Evergreen or semi liquid fund | Open to new capital with periodic, limited liquidity | Managers targeting private wealth channels |
Closed ended funds remain the most common choice for direct lending, because the life of the fund matches the life of the loans. Evergreen vehicles are growing, but they require careful liquidity management, since loans cannot be sold quickly without a discount.
Why Asian Direct Lenders Use a Hong Kong Limited Partnership Fund (“LPF”)
For managers based in the region, a HKLPF offers an onshore alternative to similar structures in Singapore, Cayman Islands, BVI, Luxembourg, Jersey & Guernsey. It works well as the fund layer in each of the architectures above.
Key advantages for direct lending
Flexible investment scope. There are no restrictions, or other criteria, for the underlying investment, which does not necessarily need to be located in Hong Kong. Loans to borrowers across Asia can sit in the same fund.
Contractual freedom. The limited partnership agreement (“LPA”) can be drafted to reflect recycling rights, leverage limits and interest distribution policies.
Confidentiality. Only the details on Form LPF1 are filed on the public register. The identities of LPs and the economic terms of the LPA remain confidential.
Legal framework. A HKLPF operates within a well established and robust common law legal and regulatory regime, which matters when security needs to be enforced.
Speed. With documents prepared, the overall setup process takes around two weeks.
Structural points to plan for
A HKLPF has no separate legal personality. It acts through its GP, which has unlimited liability for the fund’s debts and obligations. For that reason, many managers use a limited company as GP, and hold loans through SPVs rather than lending directly from the fund. You can compare the fund and company options in our guide to the HKLPF vs a private limited company.
Every HKLPF must also have a registered office in Hong Kong, an investment manager (which can be the GP), an authorised representative for anti money laundering measures, and an auditor. You will also need a law firm to set up an LPF for you.
Regulatory and Tax Questions for Non Bank Lenders
Licensing
Direct lending raises licensing questions at two levels. At the manager level, an SFC licence may be required where regulated activity is carried on in Hong Kong. If no regulated activity is being undertaken, or if the fund invests only in instruments that are not securities, the position may differ. Bilateral loans are generally not treated as securities, while notes and bonds are.
At the lending level, a vehicle making loans to Hong Kong borrowers should consider the Money Lenders Ordinance (Cap. 163). A money lenders licence may be required unless the loan falls within an exemption. Lending into other Asian markets brings its own local rules, which is one reason managers place lending SPVs in specific jurisdictions.
Tax
A HKLPF may qualify for profits tax exemption under the unified fund exemption regime, subject to certain conditions. The Inland Revenue (Amendment) Bill 2026 proposes to bring loans and private credit more clearly within the regime, together with new reporting and economic substance requirements. Managers should monitor its progress; and review our article on economic substance for a HKLPF has detailed analysis on this.
Withholding tax on interest paid by borrowers in other countries is often the larger cost for a direct lender. The choice of lending vehicle, and whether it can access a tax treaty, should be reviewed for each lending jurisdiction.
Building the Vehicle: Practical Steps
Map the lending footprint. Identify where borrowers are located and where security will be taken.
Choose the fund layer. Decide between a single fund, master feeder or parallel structure.
Design the lending layer. Determine whether SPVs are needed and in which jurisdictions.
Plan leverage. Agree whether financing will sit at fund level, SPV level or both.
Draft the LPA to reflect credit specific terms.
Register the fund. For a HKLPF, the registration application must be filed by a Hong Kong law firm or a Hong Kong solicitor through Form LPF1.
Open accounts and onboard investors. Appoint service providers, open the bank account and admit LPs.
FAQs About Direct Lending Fund Structures
Should a direct lending fund lend directly or through an SPV?
It depends on the strategy. Lending directly from the fund is simpler and cheaper for a single jurisdiction portfolio. SPVs add cost, but provide ring fencing, cleaner security packages and flexibility for asset level financing.
Can a HKLPF act as a feeder into a direct lending master fund?
Yes. A HKLPF can be used as a feeder fund, investing into a master fund that holds the loans. This allows managers to offer Asian investors an onshore entry point into a wider platform.
Can multiple direct lending funds share the same GP?
Yes. Multiple HKLPF can share the same GP, which is common when a manager runs successive fund vintages or parallel vehicles. Each fund still needs its own LPA, registration and audit.
Do direct lending funds need a custodian?
A HKLPF is not required to appoint a custodian. Loan documents and security are typically held by the lending vehicle or a security agent, and investors may still expect robust arrangements for safekeeping and cash controls.
How long does it take to set up a direct lending LPF?
With documents prepared, the overall setup process takes around two weeks. Additional time should be allowed for lending SPVs, leverage facilities and any licensing applications.
Registering a Hong Kong Limited Partnership Fund must be done through a Hong Kong law firm or an admitted Hong Kong solicitor.
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