AIFMD II: Overview of the Loan Origination Regime - now is a key preparation period

As the April 2026 deadline approaches, AIFMs must now be in the final stages of aligning their lending strategies and internal frameworks with the new loan origination rules under AIFMD II.

Introduction

In November 2023, European institutions finalised a political agreement on a new directive aimed at amending the existing AIFMD, known as the Amending Directive. This directive was published in the official Journal in March 2024. A major challenge was establishing a framework for EU AIFMs managing AIFs involved in loan origination activities.

This article summarises the key features of the loan origination regime established in the political agreement. The new regulations will take effect on April 16, 2026, and will be particularly relevant for managers of dedicated credit funds and those managing other funds that provide loans, including shareholder loans in private equity contexts.

What is a ‘Loan-Originating AIF’?

A "loan-originating AIF" is defined in Article 4 as an AIF that either:

• Primarily focuses on originating loans, or

• Has originated loans that account for at least 50% of its net asset value.

Loan origination is described as granting loans directly by an AIF or indirectly through third

parties or special purpose vehicles, where the AIFM or AIF is involved in structuring the loan

prior to exposure.

AIFMD II differentiates between an AIF engaged in loan origination and a “loan originating AIF,” which has implications for the application of various rules.

Risk Management Requirements

1. Policies and Procedures

AIFMs are required to implement effective policies, procedures, and processes for granting credit related to loan origination activities. If an AIFM oversees an AIF engaged in loan

origination or purchasing loans from third parties, it must also manage credit risk and

administer the AIF’s credit portfolio. These policies must be regularly updated and reviewed

at least annually.

These requirements do not apply to shareholder loans, provided their total does not exceed

150% of the AIF's capital.

2. Concentration Limits

AIFMs must ensure that the total value of loans to any single borrower does not exceed 20%

of the AIF’s capital if the borrower is:

• A financial undertaking defined by Article 13(25) of Solvency II,

• Another AIF, or

• A UCITS.

This 20% limit must be adhered to as specified in the AIF’s official documents and can be

extended under exceptional circumstances.

3. Leverage Limits

For "loan-originating AIFs," leverage must not exceed:

• 175% for open-ended AIFs,

• 300% for closed-ended AIFs.

Leverage is calculated as the ratio of the AIF’s exposure to its net asset value. Certain

borrowing arrangements fully backed by investor commitments can be excluded from this

calculation.

4. Risk Retention Requirements

To discourage quick re-sales of loans on secondary markets, AIFMs must retain 5% of the

notional value of each loan they originate and subsequently transfer to third parties. Specific

retention periods apply based on the nature of the loan.

5. Restrictions on Lending

AIFMD II prohibits AIFs from granting loans to:

• The AIFM or its staff,

• The depositary or its delegates,

• Any entity within the AIFM’s group, unless it is a financial undertaking that exclusively finances unrelated borrowers.

Member States may also restrict AIFs from lending to consumers, as defined by the

Consumer Credit Directive.

6. Prohibition on Originate to Distribute

AIFMs are prohibited from managing an AIF that engages in loan origination solely for the

purpose of transferring those loans to third parties.

Liquidity Management Obligations

Under AIFMD II, a loan-originating AIF can only be open-ended if its AIFM demonstrates that the AIF’s liquidity risk management system aligns with its investment strategy and redemption policy. Open-ended AIFs are subject to enhanced liquidity risk management requirements, including selecting additional liquidity management tools from a specified list.

Grandfathering

The leverage limits, concentration limits, and liquidity management requirements mentioned

above do not apply to preexisting AIFs until April 16, 2029, or at all if those AIFs do not raise

further capital after AIFMD II takes effect.

However, if an existing AIF is already in breach of the leverage or concentration limits when

AIFMD II takes effect, it must not increase its leverage or lending until April 16, 2029.

Additionally, some of the requirements relating to loan origination could apply to loans

originated from April 15, 2024, if they are still in place by April 16, 2026.

Conclusion

The introduction of the loan origination regime under AIFMD II represents a significant shift

in the regulatory landscape for EU AIFMs. By establishing clear definitions, risk management

protocols, and obligations regarding loan origination, the directive aims to enhance

transparency and stability within the financial system.

As the effective date approaches, AIFMs must ensure compliance with these new

requirements to successfully navigate the evolving regulatory environment. This regime not

only impacts dedicated credit funds but also influences a broader range of financial entities

engaged in loan activities, underscoring the need for adaptation to these regulatory changes.

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