United States – Fund Finance

A loan-originating AIF can be open-ended only if the AIFM can
demonstrate to its national competent authority (NCA) that the
AIF’s liquidity risk management system is compatible with its
investment strategy and redemption policy (without prejudice to the
thresholds, restrictions, and conditions in EuVECA, EuSEF, and
ELTIF regulations).

Open-ended loan-originating AIFs will also be subject to the new
liquidity management provisions under AIFMD2 (which we do not
expect to have significant impact in practice).

Limits are 175% for open-ended funds and 300% for closed-ended
funds (calculated according to the commitment method and expressed
as the ratio between the fund’s exposure relative to the
fund’s net asset value and to exclude borrowing fully covered
by contractual commitments).

There are rectification provisions should caps be breached
unintentionally.

There is a carve-out for shareholder loans (see below).

AIFMs must have effective and proportionate policies,
procedures, and processes in place (and review them at least
annually) for the granting of loans as well as for assessing credit
risk and administering and monitoring their credit portfolios.

There is a carve-out for shareholder loans (see below).

We would expect many EU managers to already have procedures in
place, which may simply need to be confirmed and formalised and
with annual reviews set up.

This is designed to mitigate risks to financial stability and
support professional management of AIFs.

This is a 20% limit on loans to a single borrower if that
borrower is a financial undertaking, MiFID investment firm, AIF, or
UCITS fund. The 20% relates to the fund’s capital, which is an
aggregate of capital contributions and uncalled capital committed
to an AIF after all fees, charges, and expenses directly or
indirectly borne by investors are deducted. Note the
“capital” definition is based on a closed-ended fund (as
is the case in the ELTIF Regulation), and we would expect some
guidance or clarification as to how this definition and related
provisions such as this are to be applied to open-ended AIFs.

The limit includes loans made through a special purpose vehicle
(SPV).

The limit applies after a ramp-up period of up to 24 months from
initial subscription as set out in the AIF’s constitutional
documents and which may be extended by a year by the AIFM’s NCA
in exceptional circumstances on the AIFM submitting a justified
investment plan. In addition, the limit ceases to apply once the
AIF starts to sell assets either to redeem or as part of the
AIF’s liquidation; there is also flexibility for AIFs raising
or reducing capital.

This diversification requirement is designed to contain the risk
of interconnectedness between AIFs and other financial market
participants.

An AIF has to retain at least 5% of the notional value of loans
it has originated and subsequently transferred to a third
party.

For originated loans whose maturity is up to eight years (and
any loans granted to consumers), that amount must be held until
maturity. For other loans, that amount must be held for at least
eight years.

Various carve-outs apply (but there is no exemption for
transfers to affiliates), including where the AIFM is selling
assets to redeem units as part of the AIF’s liquidation; where
the loan sale is necessary for the AIFM to implement the AIF’s
investment strategy in the investors’ best interests or due to
a deterioration in the risk of the loan detected by the AIFM’s
risk management and due diligence and that the buyer has been
informed of; and where there would be a breach of product
investment or diversification limits or regulatory
requirements.

This is to avert moral hazard and maintain the general credit
quality of loans originated by an AIF.

Member states shall prohibit AIFs that follow an
originate-to-distribute investment strategy, that is an investment
strategy under which loans are originated with the sole purpose of
selling them.

As for risk retention, this is designed with the same moral
hazard/credit quality objective.

An AIF cannot lend to its AIFM or its staff, any AIFM delegates,
the depositary and its delegates, or group entities of the AIFM
(except for third-party finance, i.e., the affiliate exclusively
finances other borrowers).

This is to limit conflicts of interest. The position of AIFM
associates will need to be considered.

The proceeds of loans (minus any administrative fees) must be
attributed to the AIF in full. This will need to be considered in
the commercial terms.

Pre-contractual investor disclosures: the costs and expenses of
loan administration.

Periodic investor disclosures: portfolio composition of
originated loans.

Regulatory reporting: total amount of leverage used by the
AIF.

Shareholder loans are exempt from two requirements:

• Having policies and procedures on loan origination




• Adhering to leverage limits for loan-originating AIFs

The other requirements set out in the table above will still
apply.

Shareholder loans are granted by an AIF to an undertaking in
which the AIF holds directly or indirectly at least 5% of the
capital or voting rights (and where the loan cannot be sold
independently to third parties) that do not exceed 150% of the
AIF’s capital.

There is no definition of “loan,” and the likely
interpretation is that an AIF that holds preference
shares/preferred stock in its portfolio companies or SPVs and/or
lends to them by way of transferable securities will not be making
loans for AIFMD2 purposes.

For AIFMs managing AIFs that originate loans before 16 April
2024, there is deemed compliance for certain provisions:

• 20% single-borrower limit




• Leverage limits




• Requirement to be closed-ended

The deemed compliance applies indefinitely for pre-existing AIFs
that do not raise additional capital after that.

From 16 April 2029, these AIFMs have to comply only with the 20%
single-borrower limit, leverage limits, and the requirement to be
closed-ended for loan-originating AIFs. These AIFMs can also
continue to manage such AIFs without having to comply with
provisions on policies and procedures, restrictions on entities to
lend to and originate-to-distribute strategies, disclosures on loan
proceeds, and the 5% risk retention.

AIFMD2 analysis

This AIF will be subject to the requirements shaded green in the
table above.

It is not a loan-originating AIF and is therefore not subject to
the restrictions shaded in yellow above (i.e., leverage limits and
the default requirement to be closed-ended).

No grandfathering applies.

Main Impact

20% concentration limit: possible issue for an
AIF with a bridge loan from the AIF to a portfolio company/SPV that
breaches the 20% limit (and is not able to fall within the carve
outs)

5% risk retention (but consider if any
exemptions)

Policies and procedures in place and reviewed annually (note
shareholder loan exemption)

Prohibited loans (mainly conflict situations)

Prohibition on “originate to distribute”
strategies

Proceeds of loans

Investor and regulatory disclosures

AIFMD2 analysis

This AIF will be subject to the requirements shaded yellow and
green in the table above (it is a loan-originating AIF). As an
open-ended fund, it will also be subject to the new liquidity
management provisions in AIFMD2 from April 2026.

Some of the grandfathering rules apply.

Main Impact

• Deemed compliance with the requirement to be closed-ended; 20%
  concentration limit and 175% leverage limit




• Unable to increase those values or limits (but otherwise deemed
  compliant) if specified leverage or concentration limits are
  breached during this period




• Investor and regulatory disclosures

From 16 April 2029, the fund has to comply with the
following:

• To be open-ended: demonstrate to the
  AIFM’s NCA that the AIF’s liquidity risk management
  strategy is compatible with its investment strategy and redemption
  policy (subject to level 2 measures, to follow)




• Specified leverage limits: 175% for open-ended
  (or 300% if required to be closed-ended)




• 20% concentration limit

AIFMD2 analysis

As for Case Study 2, this AIF will be subject to the green- and
yellow-shaded requirements in the table above (it is a
loan-originating AIF). As an open-ended fund, it will also be
subject to the new liquidity management provisions in AIFMD2 from
April 2026.

However, as it is no longer raising capital, all of the
grandfathering rules apply.

Main Impact

No compliance with new requirements (deemed
compliant, which applies indefinitely for preexisting AIFs that do
not raise capital after 16 April 2024)

AIFMD2 analysis

This AIF will be subject to the requirements shaded yellow and
green in the table above. Some grandfathering provisions apply.

But because it grants only shareholder loans, it will benefit
from two exemptions (specified leverage limits and policies and
procedures in place), subject to member states imposing stricter
rules.

Main Impact

From April 2026: Investor and regulatory
reporting

From 16 April 2029: 20% concentration limit