Who Can Borrow from an ADGM Private Credit Fund? Lending Restrictions Every Manager Should Know

By CRYPTOVERSE Legal Consultancy

A private credit fund manager finds an attractive financing opportunity. The borrower has strong revenues, offers security over its assets and agrees to an interest rate that fits the fund’s return target.

The investment team is ready to proceed. Then the compliance team asks a question that changes the discussion:

“Is this a borrower the fund is legally allowed to finance?”

For an ADGM Private Credit Fund, a sound credit assessment is essential, but it is only part of the decision. The Financial Services Regulatory Authority’s (FSRA) Fund Rulebook also restricts who may receive credit and who may benefit from it.

That second point is easy to miss. A loan can be documented in the name of one company while its proceeds benefit someone else. Managers need to examine the transaction’s substance before approving the facility.

The starting rule: five categories the fund cannot finance

Under FUNDS Rule 13A.3.1, the manager of an ADGM Private Credit Fund must not allow credit to be provided to, or for the benefit of, any of the following:

These are borrower and beneficiary restrictions. They are separate from the rules on how much the fund may lend to an eligible borrower. The FSRA’s supplementary guidance highlights these exclusions as part of its private credit framework. (assets.adgm.com)

Why “for the benefit of” deserves special attention

Suppose a fund proposes to lend to a company. The company will promptly transfer the proceeds to an individual shareholder, another investment fund or a related entity that intends to trade speculative assets.

The named borrower is a company. But FUNDS Rule 13A.3.1 asks the manager to consider whether credit is being provided for the benefit of a restricted person.

That does not mean every indirect economic benefit automatically breaches the rule. It does mean that a manager should investigate the purpose, expected flow of funds and ultimate financing beneficiary, and obtain transaction-specific advice where the answer is unclear.

A borrower eligibility review should therefore go beyond checking the name on the facility agreement. It should examine:

• The proposed borrower and its ownership;
• Any guarantor, intermediary or entity receiving the proceeds;
• The stated and expected use of proceeds;
• Transfers within the borrower’s group; and
• Whether the structure could give a restricted person access to financing indirectly.

The legal conclusion will depend on the facts and the applicable defined terms.

1. Can the fund lend to an individual?

No. Natural persons are expressly excluded under FUNDS Rule 13A.3.1(a).

A fund established under ADGM’s Private Credit Fund framework cannot treat an attractive personal loan as permissible simply because it is secured, offered to a wealthy borrower or arranged through a professional intermediary. The borrower restriction concerns the nature of the recipient, not just the credit quality of the transaction.

A manager should also examine arrangements in which a corporate borrower is proposed chiefly as a route for financing an individual. The rule extends to credit provided for the benefit of natural persons.

2. What is an “Affected Person”?

An Affected Person is a defined term, not merely someone the manager considers to have a conflict of interest.

In relation to a fund, the current ADGM Glossary definition includes its fund manager, governing body, eligible custodian, trustee or other oversight provider, and any adviser. It also includes a holder of 5% or more of the fund’s units, as well as an Associate of a person in those categories. GLO, definition of “Affected Person”; FUNDS Rule 13A.3.1(b).

Consider a sponsor proposing that its Private Credit Fund finance a business owned by a significant fund investor. The team should not stop at asking whether the interest rate is commercially reasonable. It must establish whether the borrower or financing beneficiary is an Affected Person under the Glossary. If so, the prohibition in Rule 13A.3.1 is directly relevant.

This makes ownership and relationship checks essential at both stages: before a loan is approved and whenever a proposed transaction is amended. A manager should use the precise Glossary definitions when assessing the parties and their Associates.

3. Can one ADGM Private Credit Fund lend to another fund?

No credit may be provided to, or for the benefit of, a Collective Investment Fund under FUNDS Rule 13A.3.1(c).

A sponsor may see an opportunity to finance another investment vehicle’s acquisitions or provide it with a bridge facility. Even if the proposed borrower has substantial assets, its status as a Collective Investment Fund brings the restriction into play.

The same substance question arises where an operating company appears as borrower but the financing is intended to reach a fund. Managers should document who ultimately receives and uses the money.

4. What counts as financing speculative investment?

FUNDS Rule 13A.3.1(d) prohibits credit to, or for the benefit of, a person intending to use the financing for speculative investment.

This is a use-of-proceeds question. For example, financing a company’s equipment or working capital presents a different purpose from providing capital intended for leveraged trading. The manager should evaluate the proposed activity on its facts; the rule does not provide a shortcut based solely on a borrower’s industry label.

A practical credit file should include:

• A clear statement of permitted use of proceeds;
• Evidence supporting that purpose;
• Appropriate contractual restrictions where relevant; and
• Monitoring proportionate to the risk that proceeds could be diverted.

If the borrower’s intended use is unclear, that uncertainty should be resolved before the fund commits to lend.

5. Can the fund finance a bank or another lender?

FUNDS Rule 13A.3.1(e) prohibits credit being provided to, or for the benefit of, a Bank or Lender.

There is an important distinction here. The FSRA’s guidance recognises that a Private Credit Fund may participate in syndicated loans or purchase loans from an originating lender. Buying an eligible existing credit exposure from a lender is not necessarily the same transaction as providing credit to that lender. The structure, underlying borrower and actual flow of financing need to be analysed. Supplementary Guidance – Private Credit Funds, paragraph 2.2. (assets.adgm.com)

This is especially relevant for funds that intend to acquire loan portfolios or participate in facilities arranged by banks. The manager should identify who bears the underlying credit obligation, who receives the fund’s financing, and what legal rights the fund acquires. Where a structure resembles financing an intermediary rather than investing in eligible borrower credit, it requires closer review.

An eligible borrower is not enough: concentration still matters

Passing the borrower eligibility test does not mean a proposed loan fits the portfolio.

Under FUNDS Rule 13A.3.3, the fund’s investment strategy must limit maximum exposure to one borrower or a group of connected borrowers to 25% of the fund’s Committed Capital. The manager must also design a diversification strategy that meets the fund’s stated concentration requirements within a suitable timeframe under Rule 13A.3.2. 

Take a fund with USD 80 million of Committed Capital. Its investment strategy must respect a maximum USD 20 million exposure to any single borrower or connected borrower group. Two apparently separate companies may need to be assessed together if they are connected for the purposes of the fund’s exposure analysis.

The manager should determine how it will measure that exposure as facilities are drawn, repaid, amended or transferred.

What if the fund buys a loan instead of originating it?

An ADGM Private Credit Fund may invest in Credit Facilities through origination, purchase or participation under FUNDS Rule 4.1.7(d)(i). The FSRA’s guidance discusses these different models. (assets.adgm.com)

The route into a transaction does not remove the need for a borrower eligibility assessment. In particular, a manager purchasing a loan should establish:

1. Who the underlying borrower and financing beneficiaries are;
2. How the purchased interest is legally structured;
3. Whether the fund will be obliged to advance further credit;
4. Whether any restricted person receives credit as part of the arrangement; and
5. Whether the position fits the fund’s concentration and risk limits.

Rule 13A.3.1 is framed around allowing credit to be provided. How it applies to a particular secondary purchase or participation may require a careful review of the transaction documents. A manager should avoid assuming either that every purchase is prohibited or that every purchase escapes the borrower restrictions.

Build the eligibility decision into the lending process

The FSRA expects Private Credit Fund managers to maintain documented systems and controls for credit assessment, pricing, monitoring, collateral, impairments and valuation under FUNDS Rule 13A.2.1. Its guidance expects managers to demonstrate how their lending criteria operate in practice and how they will identify deterioration in a borrower’s risk profile. (assets.adgm.com)

A useful pre-investment borrower eligibility checklist should record:

• Recipient: Who is legally receiving the credit?
• Beneficiary: Who will use or substantially benefit from it?
• Relationships: Is any relevant party an Affected Person?
• Purpose: What will the proceeds finance?
• Intermediaries: Is a Bank, Lender or another fund involved, and in what capacity?
• Exposure: What is the fund’s combined exposure to the borrower and connected borrowers?
• Evidence: Which documents support each conclusion?
• Approval: Who has authority to resolve an unclear case before commitment?

That record helps the manager show that borrower eligibility was tested as part of the investment decision, rather than treated as a clause to add to the loan agreement afterward.

The takeaway for ADGM fund managers

An ADGM Private Credit Fund can finance eligible businesses through origination, loan purchase or participation. But FUNDS Rule 13A.3.1 draws a firm boundary around prohibited recipients and beneficiaries.

The best lending opportunity on paper can still fall outside that boundary. Before approving it, ask:

Who is receiving the credit, who benefits from it, and what will the money actually do?

Those questions should be answered alongside creditworthiness, security, pricing and portfolio concentration. Together, they form the foundation of a defensible ADGM private credit lending process.

CRYPTOVERSE Legal Consultancy advises on ADGM Private Credit Fund structuring, FSRA fund manager permissions, borrower eligibility analysis and the policies and documents needed to support a regulated lending strategy.

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