The AIFMD II directive is striking for its restraint. Targeted amendments address delegation arrangements, investor disclosure, supervisory reporting and liquidity management, but essential sections of the rules (such as the marketing passport) remain unchanged. The reforms still benefit investors by offering greater transparency and protection, but they are pragmatic.
For example, under the new rules on delegation arrangements, AIFMs must employ at least two EU-domiciled individuals fully dedicated to senior management activities. Applications for authorisation of an AIFM will now need to include details of entities to which the AIFM has delegated functions and a description of such functions. Considering industry concerns that the European Commission would look for more substantial changes which would put the existing delegation model under threat, the reforms in AIFMD II appear mild in comparison.
AIFMD II introduces enhanced disclosure and reporting obligations. Article 23 disclosures, for example, have been broadened to capture all fees, charges and expenses borne by the AIFM in connection with the AIF. There is concern that such changes would disproportionately affect smaller AIFMs, who have less resources to cope with the enhanced administrative burden. Yet, this does not substantively affect the operation of AIFs.
Another new AIFMD II requirement is that open-ended AIFs must select at least two liquidity management tools from a prescribed list which includes redemption gates, extended redemption notice periods, redemption fees, redemptions in kind, and swing pricing and dual pricing. These new requirements apply only to open-ended AIFs and Undertakings for Collective Investment in Transferable Securities, once again demonstrating how the changes introduced by AIFMD II are targeted.
Still, investors benefit from the enhanced protection offered by these new rules, which better enable funds to respond to stressed market conditions.
A New Harmonised Regime for Loan-Originating AIFs
Until now, loan-originating AIFs in the EU have been governed by a patchwork of national regimes. The most significant reform introduced by AIFMD II is a new harmonised regime for loan-originating AIFs across the internal market. The new rules include restrictions such as leverage caps, meaning leverage must not exceed 300% for closed-ended AIFs and 175% for open-ended AIFs. AIFs must also retain an economic interest of at least 5% of the notional value of loans they originate and sell, in addition to new diversification requirements to mitigate concentration risk.
Despite these new restrictions, there is plenty of optimism. Harmonisation of the underlying framework across the EU may help ease private credit funds’ regulatory compliance with various national rules and aid access to new markets within the EU.
Delays and Uncertainty
Certain regulatory and implementing standards for AIFMD II have been delayed by the European Commission until 1 October 2027 (also known as non-essential “Level 2” rules). The Commission’s rationale is that the delay will facilitate a more efficient implementation of EU policies, given the high compliance costs and regulatory complexity of adopting these measures.
For the time being, it means that AIFMs will need to comply with the “Level 1” directives without the additional detail and prescription that Level 2 measures would provide. This will create regulatory uncertainty, although it will offer AIFMs some operational breathing room. Without specific guidance on how to comply with the new requirements, we may see national-level interpretations differing across the EU, which could result in potential market fragmentation.
The directive amending the Alternative Investment Fund Managers Directive (“AIFMD II”) came into force on 15 April 2024 and was required to be transposed by member states by 16 April 2026.
Rather than revamping the EU’s alternative investment funds (“AIFs”) rulebook, AIFMD II is a measured set of targeted amendments that leaves the original architecture intact.
This includes targeted updates to delegation arrangements, disclosures and liquidity management leave the core framework intact, with the new harmonised loan origination regime representing a more significant development. The delay in Level 2 measures, however, leave AIFMs navigating regulatory uncertainty in the interim.
