AIFMD II – Practical Impact for Credit Funds

The implementation date for the revised Alternative Investment Fund Managers Directive (“AIFMD II”) on 16 April 2026 is fast approaching. The new rules introduce a harmonised framework for loan origination by alternative investment funds (“AIFs”) and will materially affect EU managers managing credit funds. This insight sets out an overview of the key rules and some of the practical issues managers need to navigate. 

What is loan origination and who is in scope?

AIFMD II defines “loan origination” as the granting of a loan either:

• directly by the fund as original lender, or

• indirectly via a third party or special purpose vehicle (SPV) where the manager (or the fund) structures the loan or pre-agrees its key characteristics before the fund gains exposure.

The rules therefore catch both direct lending and common SPV structures used by credit funds. 

The loan origination rules apply to all authorised managers. This includes EU managers (for any fund they manage, whether EU or non-EU).  Non-EU managers marketing into the EEA are generally outside the scope of these rules (subject to any goldplating by EU countries). 

Rules applicable to any fund that originates loans

These baseline requirements apply whenever a fund originates loans, regardless of whether it meets the “loan-originating fund” threshold (see below). These requirements are: 

Credit policies and due diligence. Managers must maintain effective, documented policies and procedures for (i) granting loans, (ii) credit risk assessment, and (iii) ongoing administration and monitoring of the credit portfolio. These must be reviewed at least annually. Many sponsors will already have these in place but this should be reviewed. 

Concentration limit. Loans to any single borrower that is a financial undertaking, another fund or a UCITS may not exceed 20% of the fund’s capital (calculated after deduction of all fees/expenses). The limit must be met within 24 months of first closing (extendable by up to 12 months with regulator approval) and is suspended during liquidation or capital changes. This is less likely to be relevant for most generalist fund strategies. 

Risk retention on sold loans. When an originated loan is transferred, the fund must retain 5% of the notional value until maturity (or for at least eight years if maturity > eight years). Consumer loans must be retained until maturity. Exemptions apply where the sale is:

• part of the fund’s liquidation,

• required for sanctions/product compliance,

• necessary to implement the investment strategy in investors’ best interests, or

• due to a detected deterioration in credit risk (with disclosure to the buyer).

Managers should consider adding language to fund documents to assist in relying on one of the above exemptions. 

Prohibition on originate-to-distribute strategies. managers may not manage a fund whose strategy (or part of it) is to originate loans solely for the purpose of selling or transferring them.

Prohibited borrowers. A manager must ensure that any fund it manages which originates loans does not grant loans to any of the following:

• the manager itself or any member of its staff;

• the depositary of the fund (or any delegate of the depositary);

• any delegate of the manager; or

• any entity belonging to the same group as the manager.

A narrow carve-out is available for intra-group lending where the relevant group entity is itself a financial undertaking and its lending activities are limited exclusively to borrowers that fall outside the prohibited categories listed in the first three bullets above.

Economic ownership of loan proceeds. All net proceeds (after permissible administration fees) must be attributed in full to the fund, with all administration costs and expenses disclosed under Article 23 (the disclosure required under AIFMD).

Consumer lending. Member States may prohibit funds from originating or servicing consumer loans in their territory. 

Liquidity Management Tools (“LMTs”). 

Open-ended funds – including any loan-originating funds that obtain the necessary regulatory exception to the closed-ended requirement (see below) – must select at least two liquidity management tools from paragraphs (2)-(8) of Annex V of AIFMD II. The chosen tools must be expressly set out in the fund’s documents. 

The precise characteristics that these LMTs must satisfy in order to count towards the two-tool requirement are now set out in regulatory technical standards (“RTS”) 5, which was published on 27 February 2026. Broadly, the RTS sets out the following requirements:

• Redemption gates must include a pre-determined activation threshold that may be set at fund level, investor level or a combination of both. Once activated, redemption orders must be executed on a pro-rata basis at least up to the level of the threshold.

• The extension of notice periods applies to the period between receipt of a redemption order and its execution and must not alter the fund’s redemption frequency.

• Redemption fees, swing pricing, dual pricing and anti-dilution levies must each incorporate estimated explicit transaction costs. Where appropriate to the fund’s investment strategy, they must also include implicit transaction costs – including any significant market impact of asset purchases or sales – estimated on a best-efforts basis.

• Redemption in kind permits the pro-rata transfer of assets (typically loans or loan participations) to redeeming professional investors in lieu of cash. Normal delivery of securities to authorised participants or market makers in the ordinary course of an exchange-traded fund’s dealing activity does not constitute activation of this tool.

• Side pockets may be implemented either by accounting segregation (creating a dedicated share class within the existing fund for the affected assets) or by physical separation (transferring the assets to or from a new fund). In both cases the side-pocket vehicle or class is closed to subscriptions, repurchases and redemptions.

The RTS doesn’t come into force until next year. However, managers will need to comply with the Level 1 rules by mid April which may require updates to fund constitutional documents. 

Managers may also want to consider whether their funds are open ended under AIFMD which has a slightly narrower definition than how the term is generally used commercially. 

Other updates under AIFMD II.

AIFMD II also introduces new requirements generally applicable to all funds subject to AIFMD, which are briefly summarised below:

• Article 23 pre-contractual (pre-investment) disclosures: Expanded to require a clear list of all fees, charges and expenses that are borne by the manager in connection with the operation of the fund and that will be directly or indirectly allocated to the AIF. There are also additions around liquidity risk management (including the possibility and conditions for using the selected LMTs) and, for funds that originate loans, details on the loan portfolio and related SPVs/structures. 

• Periodic/annual disclosures to investors: Strengthened requirements to report all fees, charges and expenses borne directly or indirectly by investors on an annual basis and the use of any special purpose vehicles utilised in relation to the fund’s investments. 

• Regulatory reporting (Annex IV): Increased obligations, including more granular details on delegation arrangements, the manager’s internal resources and substance (e.g., FTEs involved in portfolio/risk management and delegation monitoring), risk profile data (market, liquidity, counterparty, operational risk), and total leverage employed. 

• Delegation and substance: Enhanced information must be provided to regulators at authorisation and on an ongoing basis. This covers more detailed descriptions of delegated functions.

Additional requirements for Loan Originating funds

Additional requirements apply to “loan-originating AIFs”, which AIFMD II defines as a fund (i) whose investment strategy is mainly to originate loans, or (ii) whose originated loans represent at least 50% of its net asset value. In practice, most credit funds will fall into this category.

Leverage limits 

Loan-originating funds are subject to strict leverage caps calculated at the fund level:

• Open-ended loan-originating funds: maximum 175% of NAV

• Closed-ended loan-originating funds: maximum 300% of NAV

Closed-ended requirement. Loan-originating funds must be closed-ended unless the manager can demonstrate to its home regulator that the liquidity risk management system is compatible with the investment strategy and redemption policy.

Grandfathering. Funds constituted before 15 April 2024 are deemed compliant with the new concentration, leverage and closed-ended rules until 16 April 2029. They may not increase existing exposures above the limits during the grandfathering period.

Disclosure. Managers must make the following additional disclosures to investors:

• the composition of the loan origination portfolio;

• on an annual basis, all fees, charges and expenses borne directly or indirectly by investors; and

• on an annual basis, any parent, subsidiary or SPV used in the fund’s investments.

These supplement the existing pre-investment and periodic disclosure obligations under Article 23 and managers should ensure the new disclosures are included in practice.

Next steps for credit fund managers

• Review and update credit policies, risk management procedures and delegation arrangements.

• Assess current leverage and concentration levels against the new caps.

• Update offering documents, investor disclosures and liquidity risk frameworks.

• Monitor national implementation of AIFMD II.