Investment Funds

Loan Origination under AIFMD II

AIFMD II

The following requirements are being introduced by AIFMD II.

 

The AIFMD II loan origination regime generally

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.

Member State implementation

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).

UK position

The AIFMD II changes, including the loan origination rules, do not apply to UK AIFMs.

Key definitions and concepts

“loan origination” or “originating a loan”

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. 

“loan-originating AIF”

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.

“shareholder loans”

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 requirement for an AIFM to maintain policies, procedures and processes for granting loans does not apply to the origination of shareholder loans if their aggregate notional value does not exceed 150% of the capital of the AIF (see below)
  • the leverage limits for loan-originating AIFs do not apply to an AIF whose lending activities consist solely of originating shareholder loans, if their aggregate notional value does not exceed 150% of the capital of the AIF (see below)

“capital of the AIF”

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).

Rules solely applicable to “loan-originating AIFs”

Leverage limits for loan-originating AIFs

An AIFM must ensure that the leverage of a loan-originating AIF it manages represents no more than:

  • 175% for open-ended AIFs; and
  • 300% for closed-ended AIFs.
Open-ended AIFs

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:

  • at the request of any of its shareholders or unitholders;
  • prior to the commencement of the AIF’s liquidation phase or wind-down; and
  • according to the procedures and frequency set out in its rules or instruments of incorporation, prospectus or offering documents.

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 decrease in the capital of the AIF in connection with distributions made in accordance with the fund documents; and
  • whether an AIF’s shares or units can be sold on the secondary market.

A closed-ended AIF is therefore any AIF not falling within the open-ended criteria described above.

The Commission further notes that:

  • any AIF whose shares or units can be repurchased or redeemed after an initial period of at least 5 years, during which redemption rights are not exercisable, shall be considered a closed-ended AIF; and
  • an AIF may change between open-ended and closed-ended if the redemption policy of such AIF changes.
Leverage calculation

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.

Exception

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.

Transitional provisions

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.

Requirement that loan-originating AIFs be closed-ended

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.

Exceptions and derogations

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.

Transitional provisions

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.

Rules applicable to any AIF that engages in loan origination activity

Risk management, policies and procedures for the granting of loans

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.

Exception for shareholder loans

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.

Transitional provision

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.

Diversification requirement for loans to AIFs, UCITS and financial undertakings

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

  • another AIF;
  • a UCITS; or
  • a financial undertaking as defined in Directive 2009/138/EC (Solvency II).

“Financial undertakings” under Solvency II means any of the following entities:

  • a credit institution, a financial institution or an ancillary banking services undertaking within the meaning of Directive 2006/48/EC (CRD);
  • an insurance undertaking, a reinsurance undertaking or an insurance holding company within the meaning of Solvency II;
  • an investment firm or a financial institution within the meaning of Directive 2004/39/EC (MIFID);
  • a mixed financial holding company within the meaning of Directive 2002/87/EC (the Financial Conglomerates Directive).

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.

Exceptions and derogations

This restriction:

  • ceases to apply when the AIFM starts to sell the AIF’s assets in order to redeem units or shares as part of the liquidation of the AIF;
  • is temporarily suspended where the capital of the AIF is increased or reduced. The temporary suspension is limited to the period that is strictly necessary, taking due account of the interests of the investors in the AIF, and may last no longer than 12 months; and
  • is without prejudice to any thresholds, restrictions and conditions applicable to European social entrepreneurship funds (EUSEFs), European venture capital funds (EUVECAs) and European long-term investment funds (ELTIFs) under the relevant EU regulations.
Transitional provisions

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. 

Prohibition on loans to the AIFM, the depositary, their delegates and certain affiliates

An AIFM must ensure that an AIF it manages does not grant loans to the following:

  • the AIFM or the staff of that AIFM;
  • the AIF’s depositary or the entities to which the depositary has delegated functions in respect of the AIF in accordance with Article 21 of the AIFMD (see the “Depositaries” page);
  • an entity to which the AIFM has delegated functions in accordance with Article 20 of the AIFMD or the staff of that entity (see the “Delegation” page); and
  • an entity within the same group (defined in Directive 2013/34/EU, the Accounting Directive, as a parent undertaking and all its subsidiary undertakings), as the AIFM, except where that entity is a financial undertaking that exclusively finances borrowers that are not referred to in one of the three bullet points above.
Transitional provision

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.

Risk Retention Requirements

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:

  • until maturity, for loans whose maturity is a period of up to eight years, or for loans granted to consumers regardless of their maturity; and
  • for a period of at least eight years for other loans.
Exceptions and derogations

This requirement does not apply where:

  • the AIFM starts to sell assets of the AIF in order to redeem units or shares as part of the liquidation of the AIF;
  • the disposal is necessary for the purposes of compliance with restrictive measures adopted under Article 215 of the Treaty on the Functioning of the European Union (TFEU) (i.e. sanctions), or with product requirements;
  • the sale of the loan is necessary to enable the AIFM to implement the investment strategy of the AIF it manages in the best interests of the AIF’s investors; or
  • the sale of the loan is due to a deterioration in the risk associated with the loan, detected by the AIFM as part of its due diligence and risk management process (see the “Liquidity Management and other Operating Conditions” page), and the purchaser is informed of that deterioration when buying the loan.

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.

Transitional provision

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.

Option for Member States to prohibit origination and servicing of consumer 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.

Transitional provision

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.

Prohibition of “originate to distribute” investment strategy

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.

Transitional provision

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.

Loan proceeds must be fully attributed to the AIF; disclosure of expenses

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).

Transitional provision

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.