Circular on SFC-authorised funds with exposure to private market assets

On September 03, 2026 – SFC Circular on Enhanced Disclosure Requirements for Funds with Private Market Asset Exposure The Securities and Futures Commission ("SFC") issued a circular providing guidance to the management companies of SFC-authorised funds offering units or shares to the public in Hong Kong. The circular sets out enhanced disclosure obligations applicable where such funds hold direct or indirect exposure to private market assets, and notes that affected funds may be subject to heightened regulatory scrutiny by the SFC as deemed appropriate.

Scope of Direct and Indirect Exposure Direct exposure arises through investments in bank or non-bank direct lending (whether loans or equities) extended to unlisted companies. Under paragraph 7.3 of the Code on Unit Trusts and Mutual Funds (UT Code), such direct investments are subject to a cap representing fifteen percent (15%) of a Fund's total net asset value ("NAV"). Indirect exposure, by contrast, may be acquired through various vehicles including business development companies ("BDCs") – close-ended funds registered under the US Investment Company Act of 1940 that primarily invest in debt and equity instruments issued by small- to mid-sized US companies; collateralised loan obligations ("CLOs") – securities backed by a pool of leveraged loans, broadly syndicated loans, or direct lending facilities extended to unlisted entities; and financial derivative instruments such as Total Return Swaps on indices with exposure to leveraged or broadly syndicated loans ("TRSs"), and Significant Risk Transfers whose underlying assets comprise corporate loan exposures ("SRTs"). The SFC has clarified that the foregoing examples of indirect exposure are non-exhaustive and remain subject to periodic review and update in light of evolving market developments.

Risk Profile Considerations Direct investment in private market assets generally entails a higher degree of inherent risk compared with publicly listed securities, owing principally to illiquidity, valuation uncertainty, limited regulatory oversight, elevated credit risk, and correspondingly greater default probability. While indirect exposures do not necessarily present the same quantum of risk as direct investments, recent market developments have given rise to specific concerns, including rising default rates on underlying private credit fund positions and widening price-to-NAV discounts observed in listed BDCs. Furthermore, certain indirect exposure structures – particularly those involving layered arrangements or complex financial instruments – may afford insufficient transparency into the underlying private market assets for retail investors who are not reasonably positioned to comprehend such complexity.

Mandatory Disclosure Obligations in Offering Documents In recognition of the limited familiarity that Hong Kong retail investors typically possess with respect to private market assets, fund managers bear an obligation to ensure that prospective and existing investors receive a clear, sufficiently complete, and balanced presentation of the characteristics, nature, and extent of risks attendant upon each type of exposure. Fund managers must also confirm that selected distributors are appropriately suited to service the identified target market. Where a Fund carries direct or indirect exposure to private market assets, its offering document (including the Key Facts Statement) is required to disclose expressly: (i) the extent and means by which such exposure is accessed; (ii) the nature and characteristics of the underlying private market assets; and (iii) in both the offering documents and, where appropriate, the KFS, the key risks associated with specific categories of private market assets, including their potential impact on the Fund and its investors.

Complex Product Designation Framework A Fund shall be classified as a complex product if its aggregate direct and indirect exposures to private market assets equal or exceed fifty percent (50%) of the Fund's NAV. For funds falling below this threshold, the SFC retains discretion on a case-by-case basis to designate a Fund as a complex product, having regard to factors including: the total quantum of such exposures; the Fund's overall investment strategy, portfolio composition, and liquidity or risk profile; the specific nature and characteristics of particular asset types (for example, tranche structure and credit ratings in CLOs, or structural features and underlying assets in SRTs); and any distribution restrictions or conditions imposed by home regulators. The SFC adopts a holistic approach to this assessment. A Fund so designated as complex will be subject to the SFC's prevailing requirements governing the sale of complex products, including an obligation to ensure suitability irrespective of whether solicitation or recommendation is involved (by reference to Paragraph 5.5 of the Code of Conduct and Chapter 6 of the Guidelines on Online Distribution).

Distributor Selection, Suitability Obligations, and Marketing Compliance The circular reiterates that fund managers must comply with the requirements set out in the SFC's 'Circular to Product Providers … Guidance on Internal Product Approval Process' (issued 30 April 2014; updated 4 March 2016) pertaining to target market identification and distributor selection. Fund managers are required to ensure that appointed distributors possess adequate product knowledge, including awareness of whether the relevant Fund constitutes a complex product, the capacity to assign appropriate risk ratings, and the ability to advise investors accordingly. All marketing materials must conform to the Advertising Guidelines (latest version issued April 2013), mandating fair presentation of the Fund with commensurate disclosure of associated risks.

Regulatory Implications for New and Existing Funds New funds seeking SFC authorisation that carry private market asset exposure may be subjected to closer regulatory scrutiny; in certain circumstances, the SFC may elect not to process such applications under its FASTrack regime. For existing SFC-authorised funds holding such exposures, fund managers are expected to conduct a prompt review of their respective funds, update offering documents as soon as practicable, ensure proper communication with distributors (in particular with respect to paragraphs 9 and 10 of the circular), and consult the SFC at the earliest opportunity should any doubt arise regarding complex product classification. This circular was issued by the Investment Products Division of the Securities and Futures Commission.