AIFMD 2.0: The impact on loan origination

On 7 February 2024, the European Parliament approved the final version of the text amending the Alternative Investment Fund Managers Directive (AIFMD). The new regulation, known as ‘AIFMD 2.0’, will come into force 20 days after its publication in the Official Journal of the European Union.

In this article, we highlight the changes in relation to loan origination under AIFMD 2.0. Here’s what investment managers need to know.

Defining loan origination under AIFMD 2.0

Under AIFMD 2.0, loan origination is defined as the granting of a loan directly by an alternative investment fund (AIF) as the original lender or indirectly through a third party or special purpose vehicle (SPV).

A loan-originating AIF (LOF) is defined as an AIF whose investment strategy is mainly to originate loans or whose originated loans have a notional value of at least 50% of its net asset value (NAV).

Rules for fund managers

Loan origination will be a permitted activity for alternative investment fund managers (AIFMs) under AIFMD 2.0. However, there are several rules that AIFMs must comply with.

For a start, AIFMs engaged in loan origination activities will need to have effective policies, procedures, and processes for assessing credit risk and administering and monitoring their loan portfolio, regardless of whether the AIF meets the definition of a LOF or not. AIFMs must keep those policies, processes, and procedures updated and review them at least once a year.

Secondly, loan-originating AIFs will have to disclose all costs and expenses linked to the administration of the loans to investors. Specific disclosures on the portfolio composition of the originated loans must be made.

In terms of leverage thresholds, AIFMs must ensure that the leverage of an AIF does not exceed 175% if the AIF is open-ended and 300% if it is closed-ended (thresholds will not apply to loan-originating AIFs whose lending activities consist solely of originating shareholder loans as long as the notional value of these loans does not exceed 150% of that AIF’s capital). Note that under AIFMD 2.0, a LOF must be closed-ended unless the AIFM managing it can demonstrate to its national competent authority (NCA) that the AIF’s liquidity risk management system is compatible with its investment strategy and redemption policy.

In relation to concentration, there will be a 20% limit on loans to a single borrower if the borrower is a financial undertaking, an AIF, or an undertaking for collective investment in transferable securities (UCITS). This limit will apply as of the date specified in the legal documents of the AIF and shall be no later than 24 months from the first subscription in the AIF.

As for asset retention, AIFs must retain at least 5% of the notional value of each loan they have originated and transferred to third parties. This amount must be held until maturity for originated loans whose maturity is up to eight years and for any loans granted to consumers, and for at least eight years for other loans.

Finally, an AIF cannot lend to certain linked entities such as the AIFM or its staff, depositaries or sub-depositaries, or group entities of the AIFM. Loans originated for the sole purpose of selling them to third parties (originate-to-distribute loans) are also not allowed.

AIFMD 2.0 timeline

Once the new Directive is published in the Official Journal of the European Union, the changes will come into effect 20 days later. EU member states will then have two years to transpose it into their national laws.

It’s worth pointing out, however, that there is a five-year transitional period in relation to deemed compliance for certain provisions such as leverage limits and single borrower limits for AIFMs managing AIFs with loans originated before the amending Directive comes into force. This applies indefinitely for preexisting AIFs that do not raise additional capital after the date the amending Directive comes into effect.

For existing LOFs with loans originated before the Directive comes into force, there is no obligation to comply with requirements for disclosure of costs and expenses to investors, retaining 5% of the notional value of each loan granted and transferred to third parties, and implementation of effective policies, procedures, and processes.

What to expect

We expect Luxembourg to lead the way when it comes to transposing the new AIFMD 2.0 regulation, like it did with the original AIFMD in 2013. It is likely that the Luxembourg government will adopt the new regulation without adding more stringent local requirements (member states can adopt stricter rules during the transposition phase if they want to) and that the local authorities will be pragmatic in the interpretation of the new requirements.

That said, member states will have the ability to prohibit LOFs from granting loans to consumers in their territories if they feel that it is prudent to do so. And there is a chance that Luxembourg could apply this prohibition in order to leave the granting of consumer loans to banks, which are regulated more heavily by EU authorities.

For more information on AIFMD 2.0 and the changes in relation to loan origination, get in touch with our specialist team.