
The amended EU Alternative Investment Fund Managers Directive (AIFMD 2.0) is now in force and will be national law by April 2026. The clock is ticking for managers to put their affairs in order. Thomas Fahl, Global Head of AIFM Services and Gerry Warwick, Head of Fund Services, Channel Islands discuss how asset managers should consider AIMFD 2.0 preparations.
The window for private markets managers to ensure their funds and operations comply with the amended Alternative Investment Fund Managers Directive (AIFMD 2.0) directive is narrowing.
AIFMD 2.0 came into force on 15 April 2024, starting a 24-month countdown for member states to transpose the directive’s provisions into national law.[1] This leaves private markets managers with little over a year to ensure they comply with the new rules.
Private credit in focus
Preparations for the transition to AIFMD 2.0 will be particularly demanding for private credit funds and managers.
The private credit space has enjoyed remarkable growth in the past decade, with global private credit assets under management expanding to around US$1.7 billion in 2023, according to Preqin analysis.[2]
This has prompted EU policymakers to include rules within AIFMD 2.0 that target private credit, with a view to mitigating systemic risk and protecting investors.
Private credit funds that originate loans will now have fund level leverage limits. Open-end credit funds will have leverage capped at 300% of net asset value, with closed-ended funds subject to a 175% leverage ceiling. To limit systemic risks, private credit funds will also face restrictions on lending to other private funds and UCITS funds, with lending to these players capped at 20% of a fund’s capital.[3] Funds must also retain at least 5% of the value of any loans they originate.[4]
A change in approach
The focus on private credit is significant, not only because of the higher regulatory scrutiny, but also because the specific attention paid to private credit signals a shift in how watchdogs are approaching regulation.
In an interview with Private Debt Investor, Jiří Król, global head of the Alternative Credit Council at the Alternative Investment Management Association, explained that while the first version of AIFMD focused regulation on the manager and manager processes and disciplines, AIFMD 2.0 moves the regulatory lens on to a particular product – in this case, private credit.
This moves regulation from a principles-based approach that focuses on a manager's operations to one that sets parameters around investment strategy.
This could mean more regulation of specific strategies and products in the future, which managers, investors and advisers should be aware of.[5]
Regulatory upsides
The closer regulation of private credit under AIFMD 2.0 also comes with some upsides, however.
Regulatory certainty will be the biggest benefit. AIFMD 2.0 makes it clear that alternative investment funds are allowed to originate loans – something that was not explicit in previous regulation. This means private credit managers can now operate knowing the long-term regulatory foundation for the industry is secure.
The directive will also harmonise rules across the EU for private credit funds.
Until now, private credit has had to navigate a regulatory patchwork, with the funds subject to separate rules depending on the member state.[6]
AIFMD 2.0 makes a cross-border lending passport a reality, allowing private credit funds to benefit from seamless access to the single market without having to set up a structure in each individual member state where they raise capital.
Raising the bar on reporting
Although private credit funds will have the most work to do to comply with AIFMD 2.0, managers in other private markets segments will also be affected.
The directive raises the reporting bar for all managers of private funds, who will have to meet additional disclosures on outsourcing arrangements, internal resources and skills, and risk profile.
Managers will have to ensure their organisations are clear on the new reporting obligations, and that back-office teams have the capacity and tools to meet the additional demands.
Funds, for example, will now have to notify their respective home regulators (known as national competent authorities) when they outsource key functions such as risk management or portfolio management and produce a list of all the functions handled by third parties.[7] Funds will also have to furnish national regulators with more detailed information about the people and resources involved in the running of manager operations.[8]
Other requirements include reporting on a fund’s counterparties, liquidity and market risk exposure. Funds will also have to provide prospective investors with more information on investment strategy, fund objectives and target assets pre-investment.[9]
Assessing all options
In addition, AIFMD 2.0 will prompt managers to review their fund jurisdiction setups and ensure there is no material difference between onshore and offshore jurisdictions.
Law firm Carey Olsen, the largest in Jersey, notes that managers in offshore Channel Islands jurisdictions – who access European investors through National Private Placement Regimes rather than onshore EU structures – will face fewer additional requirements in AIFMD 2.0.[10]
This could lead to savings for funds domiciled in Jersey, as the additional reporting requirements outlined in AIFMD 2.0 will not apply to the island’s alternative investment fund managers and alternative investment funds.[11]
The differences in regulatory obligations will feed into manager analyses of the relative advantages of offshore and onshore fund jurisdictions.
A manageable change – but preparation is crucial
Overall, the introduction of AIFMD 2.0 presents a manageable change for the private markets industry. The challenges of additional reporting and liquidity management are counterbalanced by advantages accruing from additional regulatory clarity and EU passporting access for private credit managers.
As the deadline nears, managers should prioritise equipping back- and middle-office teams for compliance and reassessing offshore versus onshore jurisdictions when selecting fund domiciles.
Early preparation will be crucial to ensuring a smooth transition.
AIFMD Services
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[1] https://www.dechert.com/knowledge/onpoint/2024/3/aifmd-2-0--what-s-new--analysis-of-key-changes.html. See ‘Key Takeaways’
[2] https://www.blackrock.com/institutions/en-us/insights/private-debt-primer. See par 3 and Exhibit 1
[3] https://www.dechert.com/knowledge/onpoint/2024/3/aifmd-2-0--what-s-new--analysis-of-key-changes.html. See Section 2 “A New Loan Origination Regime” - Bullet 4 “Concentration limits”
[4] https://www.bloomberg.com/news/articles/2024-02-19/europe-plans-first-major-set-of-rules-of-private-credit-funds. See par 9
[5] https://privatedebtinvestorpodcast.podbean.com/e/aifmd-ii-why-it-threatens-funds-strategic-freedom/. Listen from circa 2:32 to 3:41
[6] https://www.securities-services.societegenerale.com/en/insights/views/news/aifmd-ii-the-granting-of-loans-by-a-fund/. See par 8.
[7] https://www.dechert.com/knowledge/onpoint/2024/3/aifmd-2-0--what-s-new--analysis-of-key-changes.html. See par 9
[8] https://www.dechert.com/knowledge/onpoint/2024/3/aifmd-2-0--what-s-new--analysis-of-key-changes.html. See ‘Authorisation’ subhead.
[9] https://www.dechert.com/knowledge/onpoint/2024/3/aifmd-2-0--what-s-new--analysis-of-key-changes.html. See “Reporting to NCAs and Disclosure to Investors” subhead
[10] https://www.careyolsen.com/insights/briefings/aifmd-ii-benefits-using-jersey-fund-domicile. See par 1 and par 1 and par 3