AIFMD II: The End of the Grey Area in Private Debt Is Approaching

AIFMD II | Directive (EU) 2024/927 | In force: 15 April 2024 | Transposition deadline: 16 April 2026

Summary. Directive AIFMD II (EU 2024/927 of 13 March 2024) marks a pivotal shift in the European regulation of alternative investment funds: for the first time, the granting of loans by AIFs is recognised, regulated and harmonised at the Union level. Putting an end to a fragmented landscape of heterogeneous national regimes, it establishes debt funds as full participants in the financing of the economy, while subjecting them to a demanding prudential framework. This article provides a detailed analysis of the new obligations — credit risk governance, leverage limits, prohibition of the originate-to-distribute model, risk retention, liquidity management, conflicts of interest — and examines the concrete measures that AIFMs will be required to implement before 16 April 2026.

I. Background and Genesis of the Reform: The End of a Grey Area

Since the 2008 financial crisis, the tightening of prudential requirements imposed on banking institutions — notably through the Basel III accords — has profoundly altered the landscape of real economy financing. Companies, and small and medium-sized enterprises in particular, have turned to alternative sources of funding. Loan funds — commonly grouped under the term private debt — have grown considerably within the European Union, partially filling the void left by banks withdrawing from medium- and long-term financing.

Prior to the adoption of AIFMD II, these funds operated within a fragmented legal landscape. Each Member State had developed its own rules: in France, the AMF had regulated this activity since 2016 through instruction DOC-2016-02; in Luxembourg, the CSSF had adopted a slightly different approach via its AIFM FAQ, section 22. This fragmentation gave rise to competitive distortions, regulatory arbitrage and prejudicial legal uncertainty.

Directive (EU) 2024/927 of 13 March 2024, known as “AIFMD II”, published in the Official Journal of the European Union on 26 March 2024, brought this situation to an end. By expressly recognising the ability of AIFs to grant loans, directly or indirectly, including through third parties or special purpose vehicles, provided that the AIF or its manager participates in structuring or defining the essential characteristics of the loan (recitals 5 and 14), the Directive establishes private debt as a legitimate component of European market finance. The message of the European legislator is clear: its development is encouraged, provided that its risks are fully managed.

II. Scope of Application: Who Is Concerned and to What Extent?

A. A Variable-Geometry Approach: AIFs Granting Loans and Loan-Originating AIFs

AIFMD II distinguishes two levels of obligations depending on the intensity of lending activity. This distinction is fundamental for fund management companies, as it determines the extent of the applicable obligations.

On the one hand, any AIF that grants loans — even on an incidental basis — falls within the scope of the general obligations relating to governance and credit risk management. These obligations also apply where the loan exposure is acquired through third parties, provided the manager participates in the structuring.

On the other hand, the Directive creates the category of loan-originating AIFs (LO AIFs) — funds whose investment strategy consists principally in granting loans. The criterion is primarily qualitative: it is assessed by reference to the fund’s overall investment policy, without the Directive establishing any automatic quantitative threshold. These funds are subject to considerably reinforced prudential obligations, including leverage limits, a closed-ended structure requirement, and a risk retention obligation.

B. The Integration of SPVs and Securitisation Structures within the Regulatory Perimeter (the scope of which under French law must be reconciled with the exceptions to the banking monopoly)

One of the most significant innovations of AIFMD II lies in its treatment of ad hoc securitisation structures. The amended Article 4(1)(b)(ar)(ii), read in light of recitals 5 and 14, expressly recognises that the management of an AIF may include the management of such structures, thereby providing legal certainty for warehouse arrangements.

However, the Directive neutralises the effect traditionally sought through these arrangements in terms of regulatory perimeter. It defines the granting of loans as including loans granted indirectly through an SPV where the AIF or its manager participates in their structuring or in defining their essential characteristics. Loans housed in a warehouse SPV are therefore treated in law as loans of the AIF itself, subject to the amended Article 15.

This approach enshrines a logic of economic substance over legal form, bringing the regime applicable to AIFs significantly closer to that applicable to credit institutions. Fund management companies will no longer be able to use an SPV as a tool for regulatory externalisation. Warehouse structures will need to be entirely reconsidered.

Practical Note — Warehouse Structures

Any SPV through which the manager participates in the structuring or negotiation of the essential characteristics of loans will be taken into account in the calculation of the AIF’s exposures, in particular for the purposes of assessing concentration limits and leverage. Purely passive structures — in which the manager merely acquires an exposure without intervening in the origination — may fall outside this perimeter, but the boundary will remain difficult to establish in practice and will in all likelihood attract particular scrutiny from competent authorities.

III. Substantive Obligations: A Prudential Framework Inspired by Banking Regulation

A. Credit Risk Governance (Amended Article 15(3))

Article 15(3) constitutes the backbone of the new obligations. It requires any AIFM managing an AIF that grants loans to implement effective policies and procedures for the granting, assessment, management and monitoring of credit risk, proportionate to the scale and complexity of the activity. This proportionality requirement is welcome: it avoids imposing on smaller funds a framework designed for large direct lending platforms, while still guaranteeing a minimum level of rigour.

In practice, these policies must cover at a minimum: borrower eligibility criteria and due diligence processes; methods for the valuation and provisioning of loans; indicators of deterioration in credit quality and early warning procedures; the management of non-performing loans and restructurings; and sectoral and geographical diversification of the portfolio.

B. Prohibition of the Originate-to-Distribute Model (Amended Article 15(4) decies)

The Directive formally prohibits AIFMs from managing an AIF whose investment strategy would consist of granting loans for the sole purpose of transferring them to third parties (amended Article 15(4) decies, paragraph 1). This prohibition is designed to prevent pro-cyclical behaviour and the systemic risks associated with a pure financial intermediation model, such as that which contributed to the subprime crisis.

It is important to emphasise that the prohibition does not apply to the transfer of loans as such, but to an exclusive distribution strategy. Models based on partial syndication or the periodic refinancing of portfolios remain conceivable, provided they are conducted in the context of an investment strategy in the interests of unitholders. The boundary between the two will be a major interpretive issue that ESMA and national authorities will need to clarify.

C. The Risk Retention Obligation (Amended Article 15(4) decies)

Where an AIF grants and then transfers loans to third parties, it must retain at least 5% of the nominal value of the transferred loans. This retention must be maintained until the maturity of the loan, or for at least eight years where the term exceeds that limit.

Strictly circumscribed derogations are provided for:

• Upon the liquidation of the AIF, where the transfer is necessary to repay unitholders;
• Where the transfer is required in order to comply with sanctions or regulatory requirements;
• Where it is rendered necessary in order to implement the investment strategy in the interests of investors;
• In the event of deterioration in the quality of the loan, provided that the acquirer is informed accordingly.

This obligation draws on the risk retention logic enshrined in the European Securitisation Regulation (EU Regulation 2017/2402, known as the “STS Regulation”), sharing its objective of aligning the interests of the manager with those of investors — although its precise modalities, which are referred to Level 2, remain incompletely defined at this stage. It is likely to have a significant impact on the asset-liability management of funds and on their ability to utilise warehouse structures, the compatibility of which with the prohibition on the originate-to-distribute model will need to be assessed on a case-by-case basis.

D. Leverage Limits (Amended Article 15(4) ter)

AIFMD II sets leverage ceilings calculated using the commitment method: 175% of NAV for open-ended LO AIFs and 300% of NAV for closed-ended LO AIFs. These limits represent the ratio of the AIF’s exposure calculated using the commitment method to its net asset value. Borrowings covered by investor commitments are excluded from the calculation.

Competent authorities retain the ability to impose stricter limits, following notification to ESMA, the ESRB and the competent authority of the AIF, where the use of leverage contributes to the build-up of systemic risk. This macroprudential safeguard clause is consistent with the intervention powers conferred on regulators under the European systemic supervision framework.

E. Closed-Ended Structure as the Default Rule and Liquidity Management (Amended Articles 16(2) bis and 16(2) ter)

AIFMD II establishes as a principle that LO AIFs must adopt a closed-ended structure. This choice reflects the intrinsically illiquid nature of loans, whose maturity is contractually determined and which cannot be realised in the short term without a substantial loss of value.

Exceptions are nevertheless provided for open-ended structures, but subject to strict conditions: the AIFM must demonstrate to the competent authority that its liquidity risk management system is compatible with the fund’s investment strategy and redemption policy (Article 16(2) bis). ESMA is required to develop regulatory technical standards (RTS) specifying the conditions under which an LO AIF may maintain an open-ended structure (Article 16(2) ter). These RTS are currently being developed and will be subject to a specific public consultation.

Pending the final adoption of the RTS, AIFMs managing open-ended LO AIFs will be required to rigorously document the consistency of their asset-liability management, selecting from among the liquidity management tools (LMTs) listed in Annex V of the Directive — redemption gates, suspension of redemptions, side pockets, redemption notice periods — those instruments appropriate to their specific strategy (direct lending, mezzanine, distressed debt, venture debt).

F. Conflicts of Interest Rules (New Article 15(4) sexies)

AIFMD II substantially reinforces the rules relating to conflicts of interest in the context of lending activities. New Article 15(4) sexies expressly prohibits the granting of loans to:

• The AIFM itself and the members of its staff;
• The AIF’s depositary and its delegates;
• Entities belonging to the group to which the AIFM belongs.

This prohibition is absolute, except where the AIF is a financial institution that finances borrowers who do not form part of the entities referred to above. It is designed to prevent situations in which the management of the AIF could be directed towards satisfying the interests of the manager or its group rather than the exclusive interest of investors. Its scope is particularly significant for integrated financial groups developing captive lending strategies.

G. Transparency Obligations (Amended Article 23)

AIFMD II reinforces the information obligations owed to investors. The amended Article 23 requires AIFMs managing LO AIFs to communicate comprehensively and on a regular basis:

• The detailed composition of the loan portfolio, including sectoral, geographical and internal rating breakdowns;
• All costs and charges borne directly or indirectly by investors, distinguishing between management fees, financing costs and loan-related charges, including at the level of SPVs;
• Default, recovery and provisioning rates for the portfolio;
• Any breaches of leverage or diversification limits and the corrective measures taken.

These transparency obligations are intrinsic to the recognition of private debt as a fully-fledged asset class: they enable institutional investors to conduct their own risk analysis and contribute to market discipline.

IV. Compliance Programme for Fund Management Companies

A. Preliminary Audit and Regulatory Mapping of Funds

The first step of the compliance programme consists of carrying out a comprehensive audit of all managed funds. For each AIF, the AIFM will need to determine: (i) the nature of the investment strategy in order to establish whether or not the fund qualifies as an LO AIF, with the loans-to-NAV ratio potentially serving as an internal indicator without constituting a legal threshold; (ii) the nature of the loans granted, distinguishing in particular shareholder loans from ordinary loans; (iii) the presence of SPVs or warehouse structures that may be reintegrated within the regulatory perimeter; (iv) the structure of the fund — open or closed — and its compatibility with the new obligations imposed by the Directive.

With respect to existing funds, the transitional regime must be carefully analysed. Funds constituted before 15 April 2024 — the date on which AIFMD II entered into force — and that have not raised new capital after that date are exempt from the leverage and diversification limits. Those that have raised capital after that date benefit from a compliance period running until 16 April 2029, but are subject to a standstill mechanism: their leverage is frozen at the level recorded at the reference date and may not be increased until compliance has been achieved.

B. Review and Updating of Legal Documentation

AIFMs will be required to carry out a thorough review of all their constitutive and contractual documents. Prospectuses, management regulations, key information documents (KID/PRIIPs) and investment agreements will need to incorporate:

• A precise description of the loan origination policy, borrower selection criteria and strategies implemented;
• The applicable leverage limits and the calculation methodology under the commitment method;
• Diversification and concentration rules for exposures;
• The conditions governing the exercise of redemption rights and the repayment policy, where applicable;
• A comprehensive breakdown of costs and charges, including at the level of SPVs linked to the fund.

For funds whose open-ended structure is no longer compatible with the default closed-ended rule, a structural amendment will need to be considered, following consultation with the competent authority and, where applicable, approval by unitholders.

C. Construction of a Formalised Credit Risk Management Framework

AIFMs will need to develop or strengthen their internal credit risk management framework in response to the requirements of Article 15(3) ter. This entails drafting documented policies and procedures covering the entire loan lifecycle: origination, structuring, monitoring, management of credit events, recovery and exit.

These procedures must be auditable, regularly reviewed and subject to validation by the governing body. Internal risk committees must incorporate expertise specific to credit risk, distinct from market and liquidity risk management functions. Stress tests specific to loan portfolios must be conducted on a regular basis.

D. Implementation or Strengthening of Liquidity Management Tools

For open-ended LO AIFs, the AIFM will need to demonstrate to the competent authority the consistency between its liquidity management system, its strategy and its redemption policy. In practice, this entails:

• The selection and operational implementation of at least two LMTs from those listed in Annex V of the Directive, adapted to the fund’s specific strategy;
• Ongoing documentation of key liquidity parameters: level of liquid assets, turnover rate, frequency and volumes of redemptions, analysis of repayment commitments;
• The conduct of stress scenarios on portfolio liquidity, incorporating assumptions of simultaneous default by several borrowers.

These elements will be necessary in order to satisfy the requirements of the RTS that ESMA is required to adopt specifically for open-ended LO AIFs pursuant to Article 16(2) ter.

E. Adaptation of Conflicts of Interest Policies

In response to Article 15(4) sexies, AIFMs will need to revise their conflicts of interest management policies to expressly incorporate the new prohibitions relating to the granting of loans. Existing conflicts of interest maps must be updated; pre-approval procedures for loans to related parties must be strengthened; alert and escalation mechanisms in the event of potentially conflicting situations must be formalised.

For integrated financial groups, particular attention will need to be paid to intra-group relationships: any loan granted to a group entity by an AIF managed by a management subsidiary must be scrutinised with the utmost rigour in light of the new prohibitions.

G. Training and Strengthening of Human Resources

Effective compliance requires specific competencies that teams will need to develop or acquire. Targeted training will be necessary for portfolio management functions (credit risk analysis, loan structuring), risk management functions (management of illiquid asset liquidity, stress testing), compliance functions (command of the new obligations and reporting processes), and for members of the governing body (validation and oversight responsibilities).

V. Timeline and Articulation with Transitional Provisions

The compliance timeline is structured around three key dates:

• 15 April 2024: Entry into force of AIFMD II. Reference date for the transitional provisions applicable to existing funds.
• 16 April 2026: Deadline for transposition by Member States and entry into application of the principal obligations: prohibition of the originate-to-distribute model, credit risk governance requirements, risk retention, conflicts of interest, transparency.
• 16 April 2029: End of the transitional period for existing funds that have raised capital after 15 April 2024: leverage limits, diversification requirements, closed-ended structure obligation.

During the transitional period, the following rule applies: if an existing fund exceeds the leverage limits, the manager may not increase the fund’s leverage further. However, if the thresholds have not been reached, an increase in leverage remains possible within the limits set by the Directive.

Furthermore, the obligations relating to the prohibition of the originate-to-distribute model, risk retention and governance apply to all loans originated after 15 April 2024, including for existing funds benefiting from the transitional regime, from the date of national transposition (16 April 2026). This clarification is of major practical importance for funds currently in their deployment phase.

To Monitor: ESMA’s RTS

ESMA is tasked with developing several series of RTS that are essential for the practical application of AIFMD II: (1) RTS on the conditions under which an LO AIF may maintain an open-ended structure (Article 16(2) ter); (2) RTS on the LMTs applicable to open-ended funds (Annex V). As these texts are not yet final, fund management companies will need to follow the consultation process closely and anticipate the adjustments that will result for their open-ended funds.

VI. Conclusion: Towards a Mature and Resilient Private Debt Model

AIFMD II constitutes a major structural reform for the European private debt sector. By harmonising the applicable rules across the Union and recognising for the first time the role of loan funds in the financing of the real economy, the Directive provides a stable and predictable legal framework.

The message of the European legislator is consistent: the development of private debt is encouraged and legitimised, but its growth must be grounded in rigorous risk management. The new obligations — prohibition of the originate-to-distribute model, risk retention, leverage limits, regulation of SPVs, reinforcement of conflicts of interest rules — outline a model of loan fund inspired by best banking prudential practices, adapted to the specific nature of alternative investment funds.

For fund management companies, the challenge is commensurate with the opportunities. Those that have anticipated and structured their compliance will be positioned to establish themselves as credible and sustainable participants in European non-bank financing, serving companies and institutional investors alike. Conversely, those that delay initiating their transformation risk being excluded from a market in the midst of consolidation.

The date of 16 April 2026 therefore marks far more than a regulatory deadline: it signals the definitive entry of European private debt into the age of maturity.

Normative References

• Directive (EU) 2024/927 of the European Parliament and of the Council of 13 March 2024 amending Directives 2011/61/EU and 2009/65/EC (AIFMD II)
• Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers (AIFMD)
• Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 (AIFMD implementing measures)
• Regulation (EU) 2017/2402 of 12 December 2017 on simple, transparent and standardised securitisations (STS Regulation)
• AMF Instruction DOC-2016-02 on the authorisation and organisational procedures for management companies managing AIFs wishing to grant loans — France
• ESMA, Consultations on the RTS relating to LMTs and open-ended LO AIFs (AIFMD II, 2024–2025)
• CSSF FAQ — AIFM Law, section 22 (Luxembourg) — pre-AIFMD II loan fund regime