AIFMD 2 – one year to go! What do private credit managers need to know?

A single party concentration limit of 20% – applicable for lending to an AIF, UCITS, or Financial Undertaking (as defined in Article 13(25) of Solvency II (Directive 2009/138/EC)) – is to apply by the date specified in the prospectus, and no later than 24 months from first subscription for shares/units in the AIF. This requirement falls away during harvesting period and can be suspended for up to 12 months where an AIF’s capital is increased or reduced. This provides flexibility for a LO AIF to be 100% concentrated to a corporate borrower.

300% limit for closed-ended and 175% for open-ended limited liquidity LO AIFs (ratio between the exposure of the fund calculated according to the commitment method and its NAV). Borrowing arrangements that are temporary in nature and fully covered by contractual capital commitments from investors in the LO AIF are excluded for the purpose of leverage calculations.

Minimum 5% interest on the notional value of any loan the AIF originates and subsequently transfers to third parties (i.e. subsequently sells on the secondary market) must be retained – subject to certain exceptions (including nonperforming loan sales and clean-up portfolio trades towards end of the AIF lifecycle).

LO AIFs are prohibited from engaging in loan origination where the whole or part of the AIF’s investment strategy is to originate loans with the sole purpose of transferring those loans or exposures to third parties. This will also apply to loans indirectly originated, for example through a special purpose vehicle (SPV).

Where an AIF originates loans, the proceeds of the loans, minus any allowable fees for their administration, shall be attributed to that AIF in full.

Details of all loans originated by the AIF must be disclosed periodically. All fees, charges and expenses directly or indirectly borne by the AIF and any parent company, subsidiary or SPV utilised in relation to the AIF’s investments by or on behalf of the AIFM are to be disclosed annually. Other governance-related disclosures are to be included in the AIF’s prospectus or offering documents.

Member states retain discretion to permit a LO AIF to originate loans to consumers in its territory, although it is expected that most NCAs will prohibit consumer lending by an AIF.

An AIF is prohibited from granting loans to the following entities: (a) the AIFM and its delegates (or the staff of the AIFM or its delegates); (b) the AIF’s depositary (or its delegates); and (c) members of the AIFM’s group (save for certain exceptions).

AIFMs of all AIFs that originate loans are required to implement and maintain effective policies, procedures and processes for assessing credit risk and administering and monitoring their credit portfolio where the AIFs that they manage engage in loan origination, including where those AIFs gain exposure to loans through third parties. Those policies, procedures and processes should be proportionate to the extent of the loan origination and reviewed regularly.

Annex IV reporting is set to be extended to include all assets in an AIF portfolio (currently only the top five assets are reported). ESMA is expected to provide the updated Annex IV template in April 2027. The AIF’s AIFM is responsible for submitting this regulatory return, and this enhanced reporting requirement is not expected to cause any issues for AIFMs.