The EU Council has today adopted stricter rules for alternative investment managers including private credit funds, that it says will improve European capital markets and strengthen investor protection in the bloc.
On 7 February, the European Parliament voted to update the Alternative Investment Fund Managers Directive (AIFMD) and the text of the Directive was then voted on by the European Council on 21 February.
The Council said that the directive will now be published in the EU’s official journal and enter into force 20 days later.
Member states will have 24 months after the entry comes into force, to transpose the rules into national legislation.
The amending directive covers an EU framework for loan-originating funds.
Some of the key changes impacting the private credit space include limits on leverage, ensuring ‘skin in the game’, and new measures to limit exposure to a single borrower.
Under the new rules, the leverage of closed-ended loan-originating alternative investment funds will be capped at 300 per cent of their net asset value, while open-ended ones will be capped at 175 per cent.
“The new EU rules capping leverage would be prudential and a credit positive for private credit in Europe and the alternative investment industry,” said Rory Callagy, an associate managing director with Moody’s private credit team.
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“While the leverage caps are higher than the typical private credit funds’ borrowing levels, the rules constitute a beneficial step towards systemic stability, transparency and limiting overall leverage, without stifling the flow of capital to medium and small-sized borrowers.”
The private credit industry is currently valued at $1.7tn (£1.3tn) and is predicted to grow to $2.8tn by 2028, according to data provider Preqin.
Authorities have raised concerns about whether the sector poses a risk to financial stability, due to a vulnerability to macroeconomic shifts.
