EU: AIFMD II – the key aspects of which asset managers should be aware

Why should I read this?

AIFMD II is the shorthand name given to an amending directive (EU2024/927) that updates both AIFMD (2011/61/EU) and the UCITS Directive (2009/65/EC).  It is perhaps unhelpful that the legislation is not known both as AIFMD II and UCITS VI.

EU member states have until 16 April 2026 to enact the provisions of AIFMD II into their national law, although some already have equivalent measures in force and others may introduce these new rules ahead of the deadline.  Accordingly, alternative investment fund managers (“AIFMs”) should be aware of the changes and the challenges and opportunities they bring.

Loan origination

Definition

AIFMD II introduces entirely new provisions regulating AIFMs managing loan originating alternative investment funds (“AIFs”).  A loan originating AIF defined as: “an AIF whose investment strategy is mainly to originate loans, or where the notional value of the AIF’s originated loans represents at least 50% of its net asset value”.  This definition is a result of a political consensus to focus on AIFs whose primary, rather than accidental, activity is to originate loans and is narrower that in the original draft published in 2021.  The rules will apply to an AIF if it grants a loan as an original lender or grants a loan indirectly through a third party or an SPV if the AIF is involved in the structuring, defining of the loan or pre-agreeing its characteristics.

Characteristics of loan-originating AIFs

Leverage limits

AIFMD II makes a clear distinction between closed-ended and open-ended AIFs, which are perceived to pose much greater risk.  Open-ended AIFs will be subject to a 175% leverage limit while closed-ended funds will be free to apply a 300% limit calculated on the commitment basis (excluding subscription lines and passive breaches). 

These limits do not apply to AIFs which limit their loan origination activity to granting shareholder loans, provided that the notional value of those loans does not exceed 150% of the AIF’s capital.  For these purpose, a shareholder loan is a loan granted by an AIF to an undertaking in which it directly or indirectly holds at least 5% of the capital or voting rights, and that loan can only be sold to a third party if sold together with the AIF’s share of the undertaking’s capital.

Presumption of closed-ended funds only

Loan originating AIFs must be closed-ended unless their AIFMs can demonstrate that liquidity risk management systems in place are compatible with the AIF’s investment strategy and redemption policy.

Requirements applicable to all loan-originating activities

Concentration limits

Loan originating AIFs will not be allowed to grant loans which in aggregate exceed 20% of the AIF’s capital (including those made through SPVs) to a single borrower which qualifies as an AIF, a UCITS or a financial undertaking.

Restrictions on lending

Loan originating AIFs will not be allowed to make loans to their AIFMs (or their staff), the AIFM’s delegates (or their staff) or depositaries (and depositaries’ delegates). In certain circumstances it may be possible to lend to group companies which are financial institutions.

Member States will have the right to prohibit AIFs from granting loans to consumers, as is currently the case under Irish domestic law.

No “originate to distribute” strategies

AIFMs will not be allowed to manage AIFs whose investment strategy either partially or wholly assumes that the sole purpose of their loan origination activities is transferring those loans or exposures to third parties.

Risk retention

In addition to the above requirement, loan originating AIFs will be required to retain 5% of each loan they originate and subsequently transfer to third parties as follows:

• loans with a maturity of less than eight years: 5% of the notional value until maturity
• loans to consumers: 5% of the notional value until maturity
• loans with a maturity of more than eight years: 5% of the notional value for at least eight years

These requirements will not apply if:

• AIFMs sell assets of AIFs they manage in order to redeem units or shares in the course of liquidating AIFs
• the disposal is necessary to comply with EU sanctions or product requirements
• the sale of the loans is necessary to allow AIFMs to implement the AIF’s strategy
• the sale is due to a deterioration in the risk associated with the loan and the purchaser is informed of such

Policies and procedures

AIFMs managing loan originating AIFs will be required to have and implement procedures for granting of credit as well as assessing credit risk and administering and monitoring the credit portfolio.  Such policies will need to be updated and reviewed at least annually.

Proceeds of loans

Loan proceeds (less administration fees) must be attributed to the AIFs that originated them.

Trevor Dolan, Partner and Head of Asset Management and Regulation in our Dublin Office, comments:

“From an Irish perspective, the Central Bank of Ireland (CBI) already has a loan-originating AIF (L-QIAIF) regime set out in the CBI’s AIF Rulebook, which broadly aligns with the requirements in AIFMD II.  The CBI has confirmed that the revisions under AIFMD II are appropriately targeted, and that the harmonisation of rules for loan-originating funds is a welcome and positive development.  It is expected that, in the near future, the CBI will work towards aligning the provisions of the domestic loan origination framework with those of AIFMD II.

“AIFMs of L-QIAIFs will have to monitor legislative and AIF Rulebook developments in Ireland and decide for themselves the extent to which the existing L-QIAIF requirements align with AIFMD II and which need to be amended.

“For those Member States where it is currently permissible to engage in loan origination strategies without specific regulatory oversight, the new AIFMD II regime will represent a significant departure.”

Delegation

Under AIFMD II all of the top-up services listed in Article 6(4) AIFMD are now subject to the delegation rules set out in Article 20 AIFMD (in addition to the list in Annex I AIFMD) regardless of the regulatory status or location of any delegate or sub-delegate.  These are:

• segregated portfolio management
• investment advice
• safe-keeping and administration of shares and collective investment undertakings units
• reception and transmission of orders relating to financial instruments

AIFMs must provide their regulator (national competent authority or “NCA”) with additional information in relation to their delegation strategy on applying for authorisation, including:

• details of the delegates
• a description of the human and technical resources the AIFM uses to:
  • performing day-to-day portfolio and risk management tasks
  • monitoring the delegated activity
• for each AIF they intend to manage:
  • a brief description of the delegated portfolio and risk management functions
  • whether such delegations amount to a full or partial delegation
• a description of the periodic due diligence measures used to monitor the delegated activity

An AIFM is not considered to be delegating when entering into marketing or distribution agreements with third parties authorised under MiFID II or the Insurance Distribution Directive.

ESMA is required to report on market practices relating to delegation to the European Parliament, Council and Commission by 16 April 2029.

Reporting

From 16 April 2027, AIFMs must report considerably more information about their delegation of portfolio management and risk management functions to their NCA.

Under Article 24 of AIFMD II, for each EU AIF an AIFM manages and for each AIF an AIFM markets in the EU, they must report to their NCA:

• the full-time equivalent number of employees performing day-to-day portfolio or risk management within the AIFM
• a list of EU member states in which the units or shares of the AIF are marketed by the AIFM or a distributor acting on behalf of the AIFM
• information about their delegates, including:
  • whether they have close links to the AIFM
  • whether they are authorised or regulated entities for the purpose of asset management
  • their supervisory authority (if any)

ESMA will publish regulatory technical standards (“RTS”) relating to AIFMD II reporting obligations in due course.  Those RTS will take into account reporting requirements to which the AIFMs are subject, international developments and standards.

Liquidity management tools

AIFMD II extends existing liquidity management provisions.  AIFMs that manage open-ended AIFs are required to select at least two liquidity management tools (“LMTs”) from a list included in a new Annex V of AIFMD II:

• suspension of redemptions and subscriptions
• redemption gates
• extension of notice periods
• redemption fees
• swing pricing or dual pricing
• anti-dilution levy
• redemptions in kind (also known as “in specie” redemption)
• side pockets to separate illiquid assets from remaining liquid investments

This list is extremely interesting as there will be many in the industry that would question the appropriateness of describing redemption fees and anti-dilution mechanisms as liquidity management tools.  

Money market funds will only be required to choose one LMT.

AIFMs will be required to implement detailed policies and procedures for the activation and deactivation of the selected LMTs and notify them to their national competent authorities.  AIFMs managing open-ended AIFs will also be permitted temporarily, if it is required by best interest of the investors, to suspend the repurchase or redemption units or shares, activate or deactivate their selected LMTs or activate side pockets.

New services AIFMs can perform

AIFMD II extends ancillary services that can be provided by AIFMs to include:

• benchmark administration under the EU Benchmarks Regulation and credit-servicing under the EU Credit Services Directive
• originating loans and servicing securitisation SPVs
• the provision of non-core services to AIFs under a MiFID top-up licence, subject to any conflicts of interest being appropriately managed

Authorisation

AIFMs applying for authorisation will be required to provide their NCA with:

• a list of the persons who conducting the business of the AIFM, including:
  • a description of their role, title and level of seniority
  • a description of their reporting lines and responsibilities within and outside of the organisation
  • an overview of the time each of those persons allocates to each responsibility
  • a description of the technical and human resources that support their activities
• a description of periodic due diligence measures the AIFM will carry out to monitor delegated activities

Organisation

The new substance rules in AIFMD II require all AIFM's business to be conducted by at least two natural persons domiciled in the EU, who must either be employed full-time or executive members of the governing body of the AIFM who are committed full-time to its business.  It is unclear whether this will apply retrospectively. 

Some Member States, including Luxembourg, have already implemented stricter substance requirements.

Disclosures

Under AIFMD II, AIFMs must make the following disclosures to investors prior to investment:

• the name of the AIF (somehow not technically already covered by Article 23)
  • AIFMD II also includes a mandate for ESMA to develop rules to prevent AIFs from using names that are unfair, unclear or misleading
• a description of the AIF’s liquidity risk management, including redemption arrangements and when and how it might use LMTs
• for loan originating AIFs, the composition of the loan portfolio

Further, the AIFM must disclose annually to investors:

• all charges and expenses directly or indirectly borne by investors
• any parent company, subsidiary or special purpose vehicle entity established by an AIFM in relation to the AIF’s investments

“Passporting” for depositaries

EU AIFs

AIFMD II doesn’t include the EU-wide depositary passport for which many stakeholders had hoped.  However, AIFMs will have the right to allow the appointment of a depositary based in another Member State than the home Member States of the AIFs they manage provided that:

• they are able to demonstrate that the depositary services provided in the home Member State cannot meet the needs of AIFs in their jurisdiction, taking into account their investment policy, and
• the aggregate amount of assets under safe keeping by depositaries in the AIF’s home Member State does not exceed EUR 50 billion

If these two conditions are meet, the appointment will be subject to the assessment by the NCA.  In practice this will mean that AIFs based in mature markets such as Luxembourg and Dublin will be required to use a local depositary.

Non-EU AIFs

It will continue to be possible under AIFMD II for a non-EU AIF to be sold in the EU despite having a depositary in a third country, provided that the depositary is not domiciled in a jurisdictions identified as high-risk under the Fourth Anti-Money Laundering Directive or on the EU list of non-co-operative tax jurisdictions.

Perhaps more interestingly, AIFMD II confirms once and for all that central securities depositaries (CSDs) should be treated as delegates by depositaries if they are acting in an “investor” (as opposed to an “issuer”) capacity.  This confirms guidance that ESMA originally gave in 2019.

Michaela Walker, Partner and European Head of the Financial Services Sector, comments:

“The AIFMD II provisions on the passporting for depositaries fall short of what they might have been. AIFs based in mature markets such as Luxembourg and Dublin will have to use a local depositary. However, there may be opportunities for depositaries to sell their services cross border into some less developed markets in smaller EU member states.”

UCITS

The AIFMD II reforms bring the regulatory regimes applicable to UCITS and retail market AIFs closer.  The reforms to the UCITS Directive algin with those to AIFMD.

Liquidity Management Tools

UCITS which are not money market funds (“MMFs”) will be required to select at least two LMTs from the list set out in new Annex IIA to the UCITS Directive:

• suspension of redemptions and subscriptions
• redemption gates
• extension of notice periods
• redemption fees
• swing pricing or dual pricing
• anti-dilution levy
• redemptions in kind (also known as “in specie” redemption)
• side pockets to separate illiquid assets from remaining liquid investments

The LMTs must be included in UCITS constitutional documents.  UCITS must implement policies and procedures for the activation and deactivation of its chosen LMTs.  These must be notified to the UCITS’ NCA.

There are two variations:

• MMF UCITS will only be required to choose one LMT
• The “redemptions in kind” LMT may only be activated to meet the redemption requests of professional investors. If activated steps should be taken to address the risks of inequality of treatment between the redeeming investors and other unit-holders

The previous power under Article 84 of the UCITS Directive for UCITS to suspend subscription and redemption orders in specific circumstances has been replaced by a broader regime, which is similar to AIFMD 2, taking into consideration the existence and use of LMTs as an alternative to suspending subscriptions and redemptions.  

Strengthening governance and reporting requirements

The AIFMD II reforms to the UCITS Directive impose on UCITS management companies (“ManCos”) requirements in relation to staffing, time commitment, conflicts of interests and delegation equivalent to those required of AIFMs, save that UCITS are subject to higher disclosure obligations and must include a list of delegated services and functions in their prospectus.

UCITS and their depositaries will be subject to a central securities depository (“CSD”) regime equivalent to that applicable to AIFs, and will also have the same delegation exemption regarding distributors authorised under MiFID II or IDD.

The new obligation for UCITS to report to NCAs is akin to the obligations of AIFs to report to NCAs under the Annex IV of AIFMD.  Equally, ManCos will be required to make regular reports on the markets and instruments in which they trade on behalf of the UCITS, arrangements for managing liquidity, current risk profile, use of leverage and results of stress tests.

Impact on the UK

The reforms in AIFMD II as described in this briefing amend only the EU AIFMD and EU UCITS Directive.  Member States are required to transpose the amendments into their national law (as above, by 16 April 2026).  As the UK is no longer part of the EU, it is not subject to this requirement to transpose AIFMD II and it is not expected that it will make the same reforms to UK AIFMD and UK UCITS.  However, it is likely that the UK regulators will keep an eye on the effectiveness of the AIFMD II reforms and it may be that the UK adopts some similar reforms inspired by AIFMD II in due course.

Further reading on AIFMD II

See our previous client briefings on AIFMD II:

• AIFMD II Timeline
• EU: Final text of political agreement on AIFMD II published

How Eversheds Sutherland can help

Since , our International Funds Net (FundsNet) team, lawyers and consultants have advised various institutions on passporting UCITS and AIFs across the EU27.  We can help you navigate the AIFMD II changes and help with your passporting needs.  See our FundsNet document for more information.