Publication
Publication
The following requirements are being introduced by AIFMD II.
The changes made to AIFMD by AIFMD II include a new set of rules which apply to AIFs that originate loans.
In the review which led to AIFMD II, the European Commission recognised that AIFs providing loans are a critical source of alternative financing, especially for small and medium-sized business, which often find traditional lending sources more difficult to access. However, EU policy makers also identified a need to harmonise the rules governing AIFs that engage in loan origination, to improve risk management across the financial market and increase investor transparency.
AIFMD II introduces a new concept of “loan originating AIF”, broadly capturing AIFs that originate loans as their main activity. New requirements will apply to an AIFM that manages loan originating AIFs. New rules will also apply to AIFMs that manage any AIF that “originates a loan”, even if loan origination is not the AIF’s main activity. These new defined concepts, and the requirements of the new regime, are explained in more detail below.
The AIFMD II loan origination rules will apply to AIFMs only once implemented in national Member State legislation, which is due to occur by 16 April 2026.
However, AIFMs managing AIFs that originate loans prior to that time should take into account the transitional provisions under AIFMD. These apply differently to each individual rule, as set out below. Although certain rules do not apply at all to loans originated by an AIF before 15 April 2024, and the application of certain other rules is suspended under 15 April 2029, the way in which the transitional provisions operate means that AIFMs should consider their effect even in advance of 16 April 2026.
We expect Member States to implement these rules such that they will only be applicable to EU AIFM (ie not non-EU AIFM, even where the AIFs they are managing are marketed in Member States pursuant to applicable national private placement regimes).
The AIFMD II changes, including the loan origination rules, do not apply to UK AIFMs.
AIFMD II introduces new rules which apply to any AIF that engages in “loan origination” (these rules are described below).
“loan origination” or “originating a loan” means the granting of a loan:
directly by an AIF as the original lender; or
indirectly through a third party or special purpose vehicle which originates a loan for or on behalf of the AIF, or for or on behalf of an AIFM in respect of the AIF, where the AIFM or AIF is involved in structuring the loan, or defining or pre-agreeing its characteristics, prior to gaining exposure to the loan.
The new AIFMD II rules on loan origination therefore apply to an AIFM not only where it manages an AIF that grants a loan directly, but also in certain circumstances where the AIF gains exposure to a loan indirectly as well by reason of the AIFM or AIF’s involvement.
In principle, any kind of loan is covered by this definition, so even funds which are not credit funds can be affected by the new rules if they originate a loan. For example, loans made by an AIF in order to fund investment subsidiaries are in scope, although there are some relaxations to the rules in the case of “shareholder loans”, as described below.
AIFMD II introduces a new concept of “loan originating AIF”, to which additional new rules will apply, as described below.
“loan-originating AIF” means an AIF:
whose investment strategy is mainly to originate loans; or
whose originated loans have a notional value that represents at least 50% of its net asset value.
Accordingly, this definition would capture an AIF that is a direct lending fund whose investment strategy is mainly to originate loans. It could also capture an AIF that is not a direct lending fund, but which otherwise originates loans that represent more than 50% of its net asset value. That could include an AIF that has one or more investment holding companies which it funds by way of loan.
There are some relaxations to the AIFMD II loan origination rules in relation to AIFs which originate “shareholder loans”.
“shareholder loan” means a loan which is granted by an AIF to an undertaking in which it holds directly or indirectly at least 5% of the capital or voting rights, and which cannot be sold to third parties independently of the capital instruments held by the AIF in the same undertaking.
In particular:
The defined term “capital of the AIF” is used in connection with certain of the loan origination rules.
“capital of the AIF” means aggregate capital contributions and uncalled capital committed to an AIF, calculated on the basis of amounts investible after the deduction of all fees, charges and expenses that are directly or indirectly borne by investors.
As well as being relevant to relaxations of the loan origination rules in respect of shareholder loans, as mentioned above, the 20% single borrower limit that applies in respect of loans made by an AIF to another AIF, a UCITS or a financial undertaking is tested by reference to the capital of the AIF (see below).
An AIFM must ensure that the leverage of a loan-originating AIF it manages represents no more than:
For these purposes it is important to distinguish between “open-ended” and “closed-ended” AIFs. The European Commission has sought to clarify what is meant by these terms in its regulation on determining types of alternative investment fund managers published on 17 December 2013.
The Commission considers that the distinguishing factor in determining whether an AIFM is managing an open-ended or closed-ended AIF should be that an open-ended AIF is an AIF whose unitholders or shareholders have the right to repurchase or redeem their units or shares out of the assets of the AIF:
The Commission further clarified that the following factors shall not be taken into account for the purpose of determining whether or not an AIF is open-ended:
A closed-ended AIF is therefore any AIF not falling within the open-ended criteria described above.
The Commission further notes that:
For this purpose, “leverage” is expressed as the ratio between the exposure of the loan-originating AIF, calculated according to the commitment method as defined in the Level 2 Regulations, and the AIF’s net asset value (see the “Leverage” page).
However, as a nuance to the calculation for these purposes, borrowing arrangements which are fully covered by contractual capital commitments from investors in the AIF are not considered to constitute exposure for the purpose of calculating the leverage ratio.
In the event of an infringement of the leverage limit which is beyond the control of the AIFM, the AIFM must, within an appropriate period, take such measures as are necessary to rectify the position, taking due account of the interests of the investors in the AIF.
Without prejudice to the powers of the competent authorities referred to in Article 25(3) of the AIFMD (see “Regulator Intervention” on the “Leverage” page), the leverage limits do not apply to a loan-originating AIF whose lending activities consist solely of originating shareholder loans, provided that the notional value of those loans does not exceed in aggregate 150% of the capital of the AIF.
AIFMs managing AIFs that originate loans and that were constituted before 15 April 2024 and raise additional capital after 15 April 2024 are deemed to comply with the leverage limit until 16 April 2029.
Until 16 April 2029, where an AIF’s leverage is above the leverage limit, its AIFM may not increase that leverage. Where an AIF’s leverage is below the leverage limit, its AIFM may not increase that leverage above the limit.
AIFMs managing AIFs that originate loans, that were constituted before 15 April 2024 and that do not raise additional capital after 15 April 2024, shall be deemed to comply with the leverage limit in respect of those AIFs.
Notwithstanding these transitional provisions, an AIFM managing AIFs that originate loans and that were constituted before 15 April 2024 can choose to be subject to the leverage limit, provided the AIFM notifies its competent authority.
An AIFM shall ensure that a loan-originating AIF it manages is closed-ended.
See the section above for the distinction between open-ended and closed-ended AIFs.
A loan-originating AIF may be open-ended provided that its AIFM is able to demonstrate to the competent authorities of its home Member State that the AIF’s liquidity risk management system is compatible with its investment strategy and redemption policy.
By 16 April 2025, ESMA is required to prepare draft Regulatory Technical Standards to determine the requirements with which loan-originating AIFs are to comply in order to maintain an open-ended structure. Those requirements must include a sound liquidity management system, the availability of liquid assets and stress testing; and an appropriate redemption policy having regard to the liquidity profile of the loan-originating AIF. The requirements must also take into account the underlying loan exposures, the average repayment time of the loans and the overall granularity and composition of the loan-originating AIFs portfolio. In a letter dated 3 March 2025, the Chair of ESMA confirmed that these would be delayed by six months – see here.
In addition, the requirement that a loan-originating AIF be closed-ended is without prejudice to the thresholds, restrictions and conditions applicable to EUSEFs, EUVECAs and ELTIFs as set out in the applicable EU regulations.
AIFMs managing AIFs that originate loans and that were constituted before 15 April 2024 are deemed to comply with the above requirement until 16 April 2029.
AIFMs managing AIFs that originate loans, that were constituted before 15 April 2024 and that do not raise additional capital after 15 April 2024, shall be deemed to comply with the above requirement limit in respect of those AIFs.
Notwithstanding these transitional provisions, an AIFM managing AIFs that originate loans and that were constituted before 15 April 2024 can choose to be subject to the above requirement, provided the AIFM notifies its competent authority.
For loan originating activities, AIFMs will be required to implement effective policies, procedures and processes for the granting of loans.
For these purposes, where AIFMs manage AIFs that engage in loan origination, including when those AIFs gain exposure to loans through third parties, those AIFMs must also implement effective policies, procedures, and processes for assessing the credit risk and for administering and monitoring their credit portfolio, keep them up to date and effective, and review them regularly and at least once a year.
These requirements do not apply to the origination of shareholder loans, where the notional value of such loans does not exceed in aggregate 150% of the capital of the AIF.
If an AIF originates loans before 15 April 2024, its AIFM can continue to manage that AIF without complying with the above requirement in respect of those loans.
An AIFM must ensure that the notional value of the loans originated by an AIF it manages to any single borrower does not exceed in aggregate 20% of the capital of the AIF, if the borrower is
“Financial undertakings” under Solvency II means any of the following entities:
This limit must be complied with by the date specified in the AIF’s rules, instrument of incorporation or prospectus, which may be no later than 24 months from the date of the first subscription for units or shares of the AIF. This date must take account of the particular features and characteristics of the assets to be invested by the AIF.
In exceptional circumstances, the competent authority of the AIFM may approve an extension of this time limit for a maximum of 12 additional months upon submission of a duly justified investment plan.
This restriction:
AIFMs managing AIFs that originate loans and that were constituted before 15 April 2024 are deemed to comply with the single borrower limit until 16 April 2029.
Until 16 April 2029, where the notional value of the loans originated by an AIF to any single borrower is above the 20% limit, its AIFM may not increase that value. Where the notional value of the loans originated by an AIF to any single borrower is below the 20% limit, its AIFM may not increase that value above the limit.
AIFMs managing AIFs that originate loans, that were constituted before 15 April 2024 and that do not raise additional capital after 15 April 2024, shall be deemed to comply with the single borrower limit in respect of those AIFs.
Notwithstanding these transitional provisions, an AIFM managing AIFs that originate loans and were constituted before 15 April 2024 can choose to be subject to the single borrower limit, provided the AIFM notifies its competent authority.
An AIFM must ensure that an AIF it manages does not grant loans to the following:
If an AIF originates loans before 15 April 2024, its AIFM can continue to manage that AIF without complying with the above requirement in respect of those loans.
An AIFM shall ensure that each AIF it manages retains 5% of the notional value of each loan that the AIF has originated and subsequently transferred to third parties.
That percentage of each loan must be retained:
This requirement does not apply where:
According to the recitals of AIFMD II, these cases include situations where retaining part of the loan would result in the AIF exceeding its investment or diversification limits or breaching regulatory requirements, or where the AIF is entering liquidation, or where the borrower’s situation has changed, for example in the event of merger or of default of the borrower if the AIF’s investment strategy is not to manage distressed assets, or where the AIF’s asset allocation is changed resulting in the AIF no longer pursuing exposure to a specific sector or to a specific asset class.
Upon the request of the competent authorities of its home Member State, the AIFM must be able to demonstrate that it meets the conditions of the relevant derogation.
If an AIF originates loans before 15 April 2024, its AIFM can continue to manage that AIF without complying with the above requirement in respect of those loans.
Without prejudice to other instruments of EU law, each Member State will have the option to prohibit AIFs from granting loans to consumers in its territory and from servicing credits granted to such consumers in its territory.
However, this prohibition does not affect the marketing in the EU of AIFs which grant loans to consumers or service credits granted to consumers.
If an AIF originates loans before 15 April 2024, its AIFM can continue to manage that AIF without complying with the above requirement in respect of those loans.
AIFMs may not manage an AIF, if the whole or part of that AIF’s investment strategy is to originate loans with the sole purpose of transferring those loans or exposures to third parties.
If an AIF originates loans before 15 April 2024, its AIFM can continue to manage that AIF without complying with the above requirement in respect of those loans.
Where an AIF originates loans, the proceeds of the loans, minus any allowable fees for their administration, must be attributed to the AIF in full.
All costs and expenses linked to the administration of the loans originated by an AIF must be disclosed in accordance with Article 23 of the AIFMD (see the “Disclosure and Reporting to Investors” page).
If an AIF originates loans before 15 April 2024, its AIFM can continue to manage that AIF without complying with the above requirement in respect of those loans.
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