What Will the World Look Like Under AIFMD II?
The revised Alternative Investment Fund Managers Directive, adopted as Directive (EU) 2024/927, introduces targeted amendments to the European regulatory framework governing alternative investment fund managers. The amendments modify the existing regime in areas including delegation arrangements, liquidity risk management, supervisory reporting, loan origination by alternative investment funds and certain aspects of the depositary framework.
The directive entered into force in April 2024. Member States are required to transpose the amendments into national law by April 2026. The revised framework therefore does not immediately alter the operational environment for alternative investment fund managers, but it establishes the legal structure within which supervisory expectations will evolve across the European Union.
For managers operating private equity, private credit, infrastructure and real asset strategies, the principal impact of the reforms lies in the introduction of more detailed regulatory requirements in specific areas of fund operation rather than a fundamental restructuring of the AIFM regulatory model.
Loan Originating Funds
One of the most substantive legislative developments introduced by AIFMD II concerns the establishment of a harmonised framework for loan origination by alternative investment funds.
Prior to these amendments, the regulatory treatment of loan originating funds varied across Member States. The revised directive introduces EU level rules governing the operation of such funds.
The framework includes several elements.
Loan originating AIFs must observe limits on exposures to certain borrowers. Where the borrower is a financial undertaking, an AIF or a UCITS, the exposure of the loan originating AIF to that borrower may not exceed 20 percent of the fund’s capital.
The directive also introduces leverage limits applicable to loan originating funds. For open ended loan originating AIFs the leverage limit is set at 175 percent. For closed ended loan originating AIFs the limit is 300 percent.
The directive also introduces a requirement that where a loan originating AIF transfers loans that it has originated, the AIF must in principle retain at least five percent of the notional value of those loans.
In addition, the directive contains restrictions on lending to certain related parties and includes structural provisions relating to the use of open ended structures for loan originating funds.
Taken together, these provisions establish a consistent EU level framework governing loan origination activity carried out by alternative investment funds.
Liquidity Management
The amended directive introduces a harmonised approach to liquidity management tools available to managers of open ended alternative investment funds.
Managers of open ended AIFs must select at least two liquidity management tools from the list contained in Annex V of the directive, subject to limited exceptions including certain money market funds. These tools include mechanisms such as redemption gates, notice periods and swing pricing.
The selected tools must be available for use where necessary to manage liquidity risk and to protect investors.
The revised framework also introduces notification requirements to competent authorities when certain liquidity management tools are activated or deactivated.
In addition, competent authorities retain supervisory powers in relation to suspension of subscriptions, repurchases and redemptions in exceptional circumstances where such measures are necessary in the interests of investors or financial stability.
The amendments therefore seek to ensure that a consistent set of liquidity management tools is available across the European alternative funds sector while preserving the responsibility of the AIFM for liquidity risk management.
Delegation Arrangements
Delegation of portfolio management and risk management functions remains a permitted feature of the AIFM regulatory framework.
The amended directive does not introduce numerical limits on the extent to which an AIFM may delegate portfolio management functions. However, it expands the information that must be reported to competent authorities regarding delegation arrangements.
The reporting framework now requires additional information regarding the identity of delegates and sub delegates, the functions delegated, the assets subject to delegated portfolio management and the oversight arrangements maintained by the authorised AIFM.
These provisions are intended to enhance supervisory visibility of delegation arrangements across the market. The directive also requires analysis of delegation practices within the European Union at the supervisory level.
Depositary Framework
The amended directive also introduces changes relating to the appointment of depositaries.
In particular, the directive allows for a limited cross border derogation under which an AIF may, in certain circumstances, appoint a depositary established in another Member State. The use of this derogation is subject to conditions, including prior approval from the relevant competent authorities and supervisory cooperation arrangements.
The amendments therefore introduce a mechanism intended to address situations in which depositary services are not available within the AIF’s home Member State, while maintaining the overall structure of the existing depositary regime.
Supervisory Reporting
AIFMD II also expands the regulatory reporting framework applicable to alternative investment fund managers.
The revised directive requires more detailed supervisory reporting in relation to matters including leverage, liquidity, exposures and delegation arrangements. The precise form of certain reporting elements will be further developed through regulatory technical standards.
The objective of the expanded reporting framework is to provide competent authorities and the European Securities and Markets Authority with more comprehensive information regarding the activities and risk profiles of alternative investment funds.
Implications for the European Alternative Funds Market
The amendments introduced by AIFMD II do not alter the central structure of the existing AIFM regime. The passporting framework for authorised AIFMs remains unchanged and the directive continues to provide the principal regulatory mechanism through which alternative investment fund managers operate across the European Union.
However, the revised framework introduces more detailed rules in several operational areas, including loan origination, liquidity management and regulatory reporting.
As a result, managers operating within the European Union will need to ensure that their internal governance, reporting and operational arrangements are capable of meeting the revised requirements once the directive has been transposed into national law.
The Position of London
The directive applies within the European Union and therefore directly affects EU authorised AIFMs.
London remains a significant centre for alternative asset management activity. Many global investment managers maintain portfolio management and investment teams in the United Kingdom while operating EU authorised AIFM entities in jurisdictions such as Luxembourg or Ireland.
The amendments introduced by AIFMD II do not alter the legal ability of EU authorised AIFMs to delegate portfolio management functions to entities established outside the European Union, provided that the existing delegation requirements are satisfied.
As a result, it is possible that existing operational structures in which investment management activities are carried out in London while regulatory management functions are performed by EU authorised AIFMs may continue to operate under the revised framework, subject to the applicable regulatory requirements.
Conclusion
AIFMD II introduces a series of targeted amendments to the regulatory framework governing alternative investment fund managers within the European Union.
The directive establishes a harmonised framework for loan originating funds, introduces a structured approach to liquidity management tools, expands supervisory reporting requirements and introduces a limited cross border mechanism within the depositary regime.
While the core architecture of the AIFM framework remains unchanged, the amendments introduce more detailed operational requirements for managers operating alternative investment funds within the European Union.
The practical effects of these reforms will become clearer as Member States implement the directive into national law and as supervisory authorities apply the revised framework in practice.