The provisional political agreement reached on the Alternative Investment Fund Managers Directive (AIFMD) Review last night provides the regulatory stability that the Alternative Investment Management Association (AIMA) and its private credit affiliate the Alternative Credit Council (ACC) sought from the Review. 

Reforms of delegation and liquidity management remain targeted and validate established practices that both policymakers and asset managers agree work well.   

• Asset managers will continue to benefit from the ability to delegate portfolio or risk management to third parties, albeit with more requirements on substance and greater transparency to regulators regarding delegation arrangements. 
• Firms will be subject to tighter restrictions around liquidity risk management. 
• EU investors will continue to benefit from access to global expertise, as well as the broadest range of alternative investment strategies. 

The agreement also includes new rules for loan origination funds (LOFs) aimed at addressing financial stability concerns.   

• Policymakers have made important changes to address the fragmented environment for LOFs and ensure that managers and their funds can lend on a cross-border basis subject to a single set of EU rules. 
• LOFs will face higher levels of regulation when it comes to liquidity risk management, leverage and retention of loans to avoid ‘originate-to-distribute’ models.  
• In addition to existing rules on leverage management, new differentiated leverage limits for open and closed-end funds will be set in the legislation – likely at 175% and 300% of NAV respectively.  

AIMA and the ACC will continue to work closely with policymakers to address any outstanding technical matters and support our members with the implementation of these new rules. 

The political agreement remains provisional, and the new requirements will not be confirmed until the legal text is finalised and published.  Member States and the European Commission will then have 18 months to transpose the Directive into national law and finalise detailed technical rules implementing the legislation. 

 Jiri Krol, Deputy CEO and Global Head of Government Affairs, AIMA said: “We welcome most of the new rules on delegation, liquidity risk management and passporting for loan origination funds as relatively sensible. Some restrictions, such as leverage limits on loan funds, are difficult to justify but we have worked closely with policymakers to ensure they are better defined and calibrated than the original proposals. 

“As usual, it’s a mixed bag and we hope the positive elements will outweigh the negatives. This agreement will provide our members with greater certainty on the future regulatory framework and allow them to focus on delivering returns to investors and capital to the economy.” 

Deborah Zurkow, Chair of the Alternative Credit Council and Global Head of Investments at Allianz Global Investors, commented: “Private credit funds provide vital finance and liquidity to EU businesses helping them to invest, grow and create jobs across the continent. While some of the reforms introduced will support that activity, others will act as a brake. Policymakers need to nurture the sector and the ACC will continue to engage with them to ensure our members can provide much-needed capital as traditional sources of finance become less accessible." 

Contact Details: 

Tom Kehoe, Managing Director, Global Head of Research and Communications  
Email: [email protected]

Editor’s notes - New rules for Loan Originating Funds (LOFs):  

Defining a LOF: 

The AIFMD defines LOFs as funds whose investment strategy is to originate loans whose notional value of originated loans is greater than 50% of their Net Asset Value (NAV).  

Leverage limits for LOFs: 

The AIFMD Review introduces extra rules on leverage that apply only to LOFs and are in addition to the reporting and risk management requirements that all AIFMs must comply with under the AIFMD.  The new rules include leverage limits, expressed as the ratio between the exposure of the LOF, calculated according to the commitment method, and its NAV. The limits are set at: 

• 175% for open-end LOFs; and 
• 300% for closed-end LOFs. 

Subscription line financing arrangements are excluded from the calculation. There is also a provision which permits any breaches of the limit to be rectified within an appropriate period of time and taking into account the needs of investors. These two provisions are modelled on the ELTIF Regulation. 

Liquidity profile of LOFs: 

LOFs will be required to have a closed-end structure unless they can demonstrate to supervisors that they have appropriate liquidity risk management practices in place to maintain an open-end structure. 

Retention requirements 

LOFs selling loans they have originated will now be required to retain 5% of the notional value of the loan.  The new rules introduce limited derogations from this requirement.  

Cross border lending 

The new rules clarify that AIFMs are permitted to originate loans on behalf of AIFs, and that LOFs can lend on a cross-border basis within the EU. 

About AIMA 

The Alternative Investment Management Association (AIMA) is the global representative of the alternative investment industry, with around 2,100 corporate members in over 60 countries. AIMA’s fund manager members collectively manage more than US$2.5 trillion in hedge fund and private credit assets. 

AIMA draws upon the expertise and diversity of its membership to provide leadership in industry initiatives such as advocacy, policy and regulatory engagement, educational programmes and sound practice guides. AIMA works to raise media and public awareness of the value of the industry. 

AIMA set up the Alternative Credit Council (ACC) to help firms focused on the private credit and direct lending space. The ACC currently represents over 250 members that manage US$800 billion of private credit assets globally.   

AIMA is committed to developing skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the first and only specialised educational standard for alternative investment specialists. AIMA is governed by its Council (Board of Directors). 

About the ACC 

The Alternative Credit Council (ACC) is a global body that represents asset management firms in the private credit and direct lending space. It currently represents 250 members that manage over US$800bn of private credit assets. 

The ACC is an affiliate of AIMA and is governed by its own board which ultimately reports to the AIMA Council. 

ACC members provide an important source of funding to the economy. They provide finance to mid-market corporates, SMEs, commercial and residential real estate developments, infrastructure as well the trade and receivables business. 

The ACC’s core objectives are to provide guidance on policy and regulatory matters, support wider advocacy and educational efforts and generate industry research with the view to strengthening the sector's sustainability and wider economic and financial benefits. 

Alternative credit, private debt or direct lending funds have grown substantially in recent years and are becoming a key segment of the asset management industry. The ACC seeks to explain the value of private credit by highlighting the sector's wider economic and financial stability benefits.