Private Lending 101: Foundational Considerations in Forming a Debt Fund

January 8, 2026

In the dynamic landscape of private lending, the strategic establishment of a debt fund becomes a pivotal move for those who seek to be a true direct lender or balance sheet lender. In this introductory guide, we’ll lay out the basic considerations when forming a debt fund.

Understanding the Basics: What is a Fund?

A debt fund, whether structured as an LLC or LP, functions as an entity that raises capital by selling ownership interests to investors. This entity plays is designed for funding, holding and selling (if needed) loans. Investors derive returns from the fund’s portfolio of loans, making it a common strategy in private lending as a means to be a direct lender or balance sheet lender.

Identifying the Right Time to Form a Fund

Determining the opportune moment to embark on forming a debt fund is crucial. Ideal candidates include originators aiming to become direct lenders and scale for the future. Additionally, those growing weary of traditional lending methods, such as corresponding, white label, table funding, or co-lender/fractional loan investments, may find value in transitioning to a direct lender/balance sheet lender model.

Regulatory Framework: Navigating Compliance

A critical aspect of forming a debt fund involves understanding the regulatory framework. Debt funds typically offer securities and often utilize a Regulation D exemption. I highlight two viable exemptions within Regulation D:

• Rule 506(B):No capital limit, a maximum of 35 non-accredited investors, no limit on accredited investors, and restrictions on marketing and general solicitation.
• Rule 506(C):No capital limit, verified accredited investors only, allows marketing and general solicitation, with verification through “reasonable steps” or professional letter.

In addition, some debt funds leverage crowdfunding exemptions like Regulation A Tier 2 which requires audited financials, SEC qualification, a maximum of $75,000,000 every 12 months, and permits advertising and non-accredited investors with no numerical limit.

Types of Funds: Open-Ended vs. Closed-Ended

Understanding the structure of debt funds is vital. There are two primary types: open-ended and closed-ended.

• Open-Ended Funds:These funds raise money continuously, providing investors with liquidity through redemption plans.
• Closed-Ended Funds:These funds raise money for a set period, and investors are typically locked in until the end of the fund’s life cycle, usually 5-7 years.

Common Distribution Models: Aligning Interests

While there is no one-size-fits-all approach, I outline three commonly used distribution models:

• Waterfall Models (2/20 Model):Featuring an asset management fee, preferred return, and a split of remaining profits, aligning with industry norms like real estate or private equity.
• Fixed Return Model:All income goes into the fund, and investors receive a set return, mimicking debt investments.
• “Solomon” Model:This model allocates all income to the fund, splitting it between the fund and the fund manager.

Ultimately, the goal is to create a distribution model that satisfies investors’ target returns and aligns interests effectively.

Conclusion

Forming a debt fund demands a comprehensive understanding of its fundamentals, regulatory nuances, and distribution models. For lenders and investors looking to take that next step, Fortra Law Partner Kevin Kim will be leading an in-depth Fund Formation webinar on January 28, 2026.

Fund Formation 101: Structuring a Fund for Success will walk through the essential building blocks of fund formation, how to select the right framework for your business, and practical ways to position your fund for long-term scalability and flexibility in an evolving private lending market.