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Overview
Significant amendments to the EU’s Alternative Investment Fund Managers Directive (AIFMD) are scheduled to apply from 16 April 2026. The updated regulatory framework, referred to as AIFMD II, will have particular impact on EU alternative investment funds (AIFs) managed by EU AIFMs providing loans.
Ahead of the implementation deadline in April, publicly available information indicates that only Denmark has incorporated the amendments into national law to date, with implementation in most other key investor jurisdictions in progress.
Whilst changes to the UK regime are expected, the UK is not currently proposing to mirror these changes in UK regulation.
New regime for “loan origination”
Under the new framework, “loan origination” or “originating a loan” means the granting of a loan either:
- 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 the AIFM in respect of the AIF, with the AIFM or AIF 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 EU AIFM not only where it manages an EU AIF that grants a loan directly, but also (in certain circumstances) where the AIF gains exposure to a loan indirectly due to the AIFM’s or AIF’s involvement.
Whilst AIFMD II does not define “loan”, the market appears to take the view that it covers loans in the ordinary meaning of the term, meaning lending arrangements negotiated and entered into by a borrower and one or more lenders. This means that transferable debt securities (such as bonds, notes, or preferred equity) are expected to fall outside of the regime.
How the rules apply
Broadly speaking, most loan origination provisions apply to all AIFs when originating loans (AIFs Which Originate Loans), with a few additional requirements applying only to AIFs which originate loans on a significant basis, known as Loan Originating AIFs.
Rules applicable to all AIFs Which Originate Loans
Concentration limits
AIFs Which Originate Loans must not make loans in excess of 20% of the AIF’s capital (including those made through an SPV) to other AIFs, UCITS, and financial undertakings (a broad term which covers a wide range of financial services firms). This does not include loans made to private companies such as SPVs.
For these purposes, an “AIF’s capital” means the 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.
Risk retention
Risk retention provisions will also apply in order to reduce incentives for AIFMs to originate poor quality loans to be immediately sold off on the secondary market. AIFs Which Originate Loans must retain 5% of each loan that they originate and subsequently transfer to third parties, as follows:
- Loans with a maturity of up to eight years: AIF must retain 5% of the notional value until maturity.
- Loans with a maturity of more than eight years: AIF must retain 5% of the notional value for at least eight years.
- Loans to consumers: AIF must retain 5% of the notional value until maturity.
As “loan” is not defined, it remains unclear whether tranched loans must be retained on a per-tranche basis or grouped together as a single “loan”.
Certain exemptions from this requirement will be available, including where:
- The AIFM sells assets of the AIF in order to redeem units or shares as part of the liquidation of the AIF;
- The disposal is necessary to comply with EU sanctions or product requirements;
- The sale of the loan is necessary to enable the AIFM to implement the investment strategy of the AIF 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 and the purchaser is informed of such deterioration when buying the loan.
Prohibition on originate to distribute strategies
AIFMs will be prohibited from managing AIFs Which Originate Loans whose investment strategy (or part of it) is to originate loans with the sole purpose of transferring those loans or exposures to third parties. This is expected to apply to loans originated directly by the AIF, as well as indirectly, for example through an SPV.
Restriction on loans to related parties
AIFMs must also ensure that AIFs that they manage do not grant loans to:
- The AIFM, its staff, or an entity grouped with the AIFM;
- The AIF’s depositary (or any delegate thereof); or
- Any delegate of the AIFM itself.
Additional rules for Loan Originating AIFs
A “Loan Originating AIF” is defined as an AIF:
- Whose investment strategy is mainly to originate loans; or
- Where the notional value of the AIF’s originated loans represents at least 50% of its net asset value.
This definition targets AIFs that carry out loan origination as a principal activity, rather than those which grant loans incidentally or on a very minor basis. Based on this, any credit fund will almost certainly be a Loan Originating AIF.
Limits on leverage
Open-ended funds (which are perceived to pose a greater risk) are subject to a 175% limit on leverage, and closed-ended funds are subject to a 300% limit on leverage.
In very broad terms, leverage under AIFMD II is expressed as a ratio between the “Exposure” of the AIF and its Net Asset Value (NAV), and is measured using the Commitment Method. Under the Commitment Method, Exposure is calculated as the sum of the absolute values of all positions (i.e., its gross asset value, including any investments and loans made), subject to specific adjustments for derivatives, netting, and hedging, and an AIF is considered to be leveraged if its Exposures are increased by the AIFM by any means – including through borrowing of cash or securities or through leverage in derivative positions or repos.
However, borrowing arrangements which are fully covered by contractual capital commitments from investors in the AIF are not considered to constitute Exposures for the purpose of calculating the leverage ratio – this exemption is directed at subscription line facilities. Similarly, where the borrowing is genuinely short term in nature, this is not captured as leverage.
The limits apply at the level of the AIF itself. However, it is currently unclear what approach regulators will take to leverage introduced elsewhere within funding structures (i.e., so-called “back-leverage”). For example, while it is anticipated that lending at a portfolio company level (i.e., an operating company into which a private equity fund might invest) currently falls outside of scope, the picture is less clear for leverage introduced at an SPV level beneath the level of the AIF (i.e., for some credit funds, where warehouse lines often sit), particularly where the SPV’s liabilities may be in part guaranteed by the AIF. Where this is the case, in our view, this would very likely count as leverage. Where there is no recourse to the fund, the position is less clear. Further guidance from the regulators will be needed on this point.
AIFMD II also allows local regulators to impose stricter leverage requirements than those set out in the Directive. Since only Denmark has so far implemented the changes into national law, it remains to be seen how many Member States will do this.
Requirement to be closed-ended
Loan Originating AIFs are required to be closed-ended unless the EU AIFM can demonstrate that its liquidity risk management system is compatible with its investment strategy and redemption policy.
Lending passport
Originating loans and servicing securitisation SPVs are also included as permitted ancillary activities for EU AIFMs. This should allow for loan origination activities to be carried on in other Member States on a cross-border basis, effectively allowing for a form of passport.
However, certain EU Member States (including France, Italy, and Germany) have national law requirements that impose restrictions on lending or require only banks to engage in this activity. Such jurisdictions will therefore need to repeal these local law measures before credit funds are able to lend in their respective jurisdictions.
Consumer lending
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. However, this prohibition does not affect the marketing in the EU of AIFs which grant loans to consumers or those which service credits granted to consumers.
Client Alert 2026-032
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