UK Law and Practice Contributed by: Fergus Wheeler, Paul Yin, Tracy Liu and Medha Vikram, Latham & Watkins
and fundraising success. Established lenders have flagship funds of more than USD10 billion, with mid-market or specialist funds ranging from USD2 to USD5 billion. Challenges in fundraising for private credit providers One-stop shop Capital allocators prefer a one-stop shop approach with pan-European focus, allowing consolidated investment across the capital structure for a streamlined strategy. Saturation The upper mid-market is saturated, increasing competition. Interest is shifting to the less com - petitive lower mid-market, offering more oppor - Capital concentration around established funds poses challenges for new entrants. Established funds with proven track records and resources, means newcomers need to differentiate through innovative strategies or a niche focus. Default risk Private credit market participants report low default rates despite macro challenges. How - ever, lenders must monitor and manage default risks, as they impact capital access. 1.9 Impending Regulation and Reform The level of regulatory scrutiny in private credit markets is generally seen to have increased in 2024. The UK Financial Conduct Authority (FCA) conducted a multi-firm review, focused on the risk of inaccurate valuations, conflicts of interest, poor liquidity and leverage controls in private credit markets. As private credit funds broaden their capital sources to include high net worth individuals and family offices, they may face tunities and potential returns. Challenges for newcomers
increased regulatory scrutiny, despite not being deposit-taking institutions, as the private credit market continues to mature. 2. Regulatory Environment 2.1 Licensing and Regulatory Approval Lenders must have an appropriate licence to carry out regulated activities in the UK. Whether lending requires a licence depends on the loan’s nature and the borrower’s sophistication: • cash loans: no licence needed for loans over GBP25,000 for “business use”; and • preferred equity/bonds/convertible instru - ments can be issued to lenders if the lender is a “professional client” under UK FCA regula - tions. Corporate lending alone doesn’t generally require UK authorisation but is subject to UK AML requirements, necessitating FCA registra - tion. Offshore entities lending to UK borrowers are typically exempt. Lenders can generally take security over a UK borrower’s assets unless this involves mortgag - es or property rights over residential real estate. 2.2 Regulators of Private Credit Funds The FCA is the primary regulator for private cred - it funds in the UK. 2.3 Restrictions on Foreign Investments UK-based private credit managers must adhere to UK sanctions regimes under the Sanctions and Anti-Money Laundering Act 2018, which is the legal basis for imposing, updating and lifting sanctions.
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