AIFMD II - A Moderate Reform After More Than 10 Years of Application of the AIFMD

Legal Insights Germany

March 14, 2024

The Alternative Fund Managers Directive (AIFMD - Directive 2011/61/EU) came into effect in Germany on July 22, 2013 when the AIFM Implementation Act came into force and brought about fundamental changes to German investment law, in particular comprehensive regulation of the previously largely unregulated "grey" capital market. After more than 10 years of application of the AIFMD, the European Parliament adopted the amending directive to the AIFMD (known as AIFMD II) on February 7, 2024 and the Council on February 26, 2024, which will enter into force in the EU member states two years after publication in the Official Journal of the European Union.

AIFMD II is not associated with the legislative bang that some in the investment industry had hoped for. Rather, the political compromise reached with AIFMD II merely addresses a few specific areas without making any far-reaching changes to the existing AIFMD system.

Regulations for Debt Funds

AIFMD II introduces the most significant changes in the area of debt funds. According to AIFMD II, management companies that manage debt AIFs may not participate in "originate to distribute" strategies in which loans are granted with the sole aim of placing the credit risk on the secondary market. In addition, the AIF will in future be required to hold an equity stake of at least 5% of the nominal value of the loan it has granted until final maturity, even in the case of placements. AIFMD II also introduces certain credit risk restrictions to the effect that no loans may be granted to the AIF's own management company or other group companies. Furthermore, no more than 20% of an AIF's capital may be lent to a single borrower, provided that the borrower is a financial undertaking (i.e., AIFM, UCITS or MIFID entity). Finally, AIFMD II requires that management companies managing debt AIFs implement effective policies, procedures and processes for the origination and management of loans and the ongoing assessment of credit risk. This requirement of AIFMD II largely corresponds to the requirements of Section 29 (5) of the German Capital Investment Code (KAGB), meaning that German management companies should already be prepared for this.

AIFMD II introduces additional requirements for specialized loan originating funds—i.e., AIFs whose investment strategy is primarily based on the granting of loans. These funds should generally be structured as closed-ended funds, unless the management company can demonstrate to the competent supervisory authority that the open-ended AIF it manages has an adequate liquidity management system that takes sufficient account of the fund's investment strategy and its unit redemption rules. Closed-ended loan originating funds are also subject to a leverage limit (i.e., the ratio between the value of the AIF's borrowings and its total value) of 300%. A leverage limit of 175% applies to open-ended loan originating funds. These leverage limits do not apply to loan originating funds that only grant shareholder loans, provided that the amount of the loans does not exceed the limit of 150% of the AIF's capital.

With the introduction of AIFMD II, the European passport for debt funds will also be introduced—i.e., European debt funds can operate across borders within the European Union, which should make it easier for companies to access debt financing.

Further New Regulations Through AIFMD II

Other new provisions of AIFMD II relate to the permissible scope of activities of licensed management companies, which will be expanded to include benchmark administration and credit servicing, as well as certain simplifications for the activities of AIF depositaries, which in future will no longer have to be located in the same member state as the AIF under management. Furthermore, the regulation on the supervision of delegation agreements (outsourcing) will be reformed and extended to all functions of the AIFMD, including ancillary services.

With regard to the marketing of non-EU AIFs, the previous requirement that the AIF in question or its management company must not be domiciled in a country classified by the FATF as a non-cooperative country is replaced by the requirement that the AIF in question or its management company must not be listed as a high-risk third country on the EU list of non-cooperative countries and territories for tax purposes in accordance with Directive EU/2015/849. In addition, the country must have signed a qualified agreement on the exchange of information in tax matters in accordance with the standards of the OECD Model Tax Convention on Income and on Capital with the member states in which the distribution is to take place.

Implementation of AIFMD II

AIFMD II will enter into force 20 days after publication in the Official Journal of the European Union. The member states then have 24 months to transpose the directive into their national law. In 2024, it is also expected to publish the regulatory technical standards (RTS) and European Securities and Markets Authority (ESMA) guidelines on AIFMD II, which will contain more detailed application requirements for AIFMD II.


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