Paperjam: What are the main impacts of AIFMD II on alternative investment business models?

Jérôme Mullmaier: Overall, AIFMD II is an evolution rather than a revolution. It introduces a number of changes, particularly in terms of delegation, transparency and liquidity management, which will apply to all managers covered by the Alternative Investment Fund Managers (AIFM) Directive. The directive also introduces specific rules for credit funds, which is unprecedented. Until now, the AIFM regime was designed to regulate the activity of fund managers, not the activity of funds, even though there was an undeniable indirect impact on the latter. The original idea behind the regulation was that its rules should apply only to fund managers. For the first time, the regulations target a strategy: that of private debt.

What new rules apply for hedge funds with credit activities?

From the moment a fund issues loans, it must comply with important rules of general application, which govern key areas such as portfolio diversification and risk retention in the event of loan transfers. There are certain restrictions too, such as the prohibition on issuing loans for immediate sale. The directive then sets out two additional specific rules, aimed at what I call “origination funds.” Their main purpose--in other words their core strategy--is to issue loans, and their net asset value (NAV) constitutes at least 50% of the loans issued by the fund. The first of these rules is that, in principle, this fund must be closed-ended, and the second says that, from now on, it must submit to maximum leverage ratios.

What does this mean on the ground?

The AIFMD II directive was adopted on 15 April 2024, and must be transposed by mid-April 2026 at the latest. A number of transitional rules currently apply to funds set up before the directive was adopted and to loans issued before that date. But even before transposition, AIFMD II is having an impact on the industry. This is particularly true when it comes to the launch of new loan vehicles.

Customers are already asking themselves a number of practical questions. For example: Can they benefit from the transitional arrangements? Will they be considered an originating fund or not? If yes, it will mean launching a closed-end fund, since an open-end fund of origination is in principle impossible without authorisation from the regulator. And the criteria for obtaining this authorisation, at the time of writing, will depend on a delegated regulation--a regulation that we are still waiting for. A draft has been submitted by the European Securities and Markets Authority (Esma) to the European Commission, which is due to give its opinion before the end of the year.

The main source of anxiety for managers is the maximum borrowing ratio. If you are an originating fund, you have maximum borrowing rules. For an open-end fund, the maximum is set at 175%. For a closed-end fund--the legal form that is in principle mandatory--the maximum is set at 300%. This is a question that needs to be considered in conjunction with the strong growth in evergreen funds. Evergreen funds are perpetual funds, meaning that they allow subscriptions and redemptions at regular intervals, generally every quarter or half-year. By definition, they are open-ended.

So in principle, you cannot set up an origination fund in this form, unless you can justify to your regulator that it is sustainable to set up an open-end fund. And this justification will depend on the delegated regulation mentioned above, the final version of which we’re still waiting for. It will then be a question of having sufficient cash or liquid assets to be able to cope with large redemption requests.

If the rules adopted by this regulation were to be particularly strict, that would have an impact on the type of funds that can be used. It would make it difficult to use unregulated funds, such as the special limited partnership (SCSp) or reserved alternative investment funds (Raif; in French Fiar) as a legal framework for an evergreen origination fund.

On the other hand, you will always be able to use a European Long-Term Investment Fund (Eltif), because European regulations allow redemption requests as long as you comply with the minimum liquidity rules that apply in this regime. And we have an additional benefit if we use the Eltif regime: a passport to access borrowers.

To sum up, this regulation that we are waiting for will have a major impact on these evergreen funds, which are particularly popular at the moment. And credit is an appropriate strategy for these funds, because they generally have recurring income. This is more complicated for private equity funds, particularly buy-out funds. If you have an origination strategy, then you regularly collect repayments or interest. And you’re in a better position to deal with redemption requests.

By the end of the year, we will have a slightly clearer picture, because obviously being able to use a non-regulated fund is more favourable for managers. It’s less restrictive than an Eltif, particularly in terms of diversification and eligible assets.

But a credit strategy conducted within the framework of an Eltif gives de facto access to borrowers throughout Europe, which is not the case with the AIFMD II regime, in which a whole series of obligations have been introduced--diversification rules, the impossibility of issuing loans for immediate sale, the use of closed-end funds for origination funds and maximum borrowing ratios--but all this without expressly conferring a passport allowing lending to any professional borrower within the European Union. On this precise point, the directive states that member states may introduce specific rules, including for loans to professionals. In a way, the member states retain the means to protect their markets.

Is this a missed opportunity?

This is one of the regrets we have about this text: many specific rules, often quite strict, have been introduced without giving fund promoters a real passport to access borrowers throughout Europe. The freedom to restrict access to retail borrowers, and therefore consumers, is generally well understood and accepted, but the absence of a clear passport for professional borrowers is, in my view, a missed opportunity.

Some countries have quite restrictive specific rules. I’m thinking in particular of France, Germany and Italy. For example, in Italy, if you want to lend via a fund to Italian borrowers, you have to obtain express authorisation from the regulator, who requires you to be “equivalent” to an Italian fund. In general, with a European fund managed by a European AIFM, this is possible. But it is still a filter to go through, an additional formality.

In Germany, you may be subject to a licensing requirement, but there is an exception for European funds subject to the AIFM Directive, and the local draft transposition seems to pave the way for loans to be issued by funds managed by non-European AIFMs. As for France, until recently the only vehicle that could lend to borrowers in the country was an Eltif, albeit one governed by French law. This possibility has now been extended to European Eltif.

Professionals should bear in mind that there are fairly strict rules in some countries and that, even with AIFMD II, it will still be necessary to check which local rules apply. As part of the transposition process, it will be necessary to study the evolution of certain national regimes that are particularly restrictive in terms of access to the local borrowers’ market. Some believe that, as a result of the directive, a fund meeting the requirements of AIFMD II will now be able to lend money to local borrowers without being subject to an additional local regime. It is hoped that this will be the case, but nothing is guaranteed as each state is free to choose its approach.

Let’s get back to fund managers. The AIFMD II directive lays down new delegation rules. What will be its main impacts on the sector?

On the subject of delegation, a number of clarifications have been made, particularly on the monitoring of delegatees--an important issue in Luxembourg, where delegating management to an entity based abroad is common practice. This is permitted under the directive, but requires AIFMs to monitor the activities of the delegate on a regular basis. AIFMD II introduces a stricter monitoring regime. Among the central points, AIFMs will have to prove to the regulator--the Commission de Surveillance du Secteur Financier (CSSF), in this case--that they have sufficient infrastructure and staff to monitor the activity of delegatees.

The CSSF has begun to give a number of indications of what it expects from the market in preparation for the arrival of AIFMD II, whose transposition is scheduled, I would remind you, for April 2026. Last October, the CSSF issued a feedback report on the delegation of portfolio management activities. The CSSF noted that, on the whole, the rules on delegation were well applied.

However, it has identified a number of areas for improvement, particularly with regard to the monitoring of delegatees, specifying that it will no longer be possible to rely solely on standard questionnaires or visits, but that robust due diligence will have to be applied to the delegatee, particularly with regard to its control functions--risk management and compliance. The fund manager must also ensure that it is in a position to take over the mandate at any time. In other words, it must have a continuity plan in place.

Professionals are faced with increased reporting requirements, but this remains a lesser evil if we remember that the issue on this point was whether supervision of delegation should remain in the hands of local regulators or be reassigned to Esma, as had been discussed at the start of the regulatory process to prepare the new directive.

There were plans to transfer the monitoring of delegations to Esma as soon as, as a result of delegation, more functions were delegated than retained. This created a lot of anxiety among professionals. There was a lot of lobbying to avoid this, and it was finally abandoned, which was greeted with a certain amount of relief in the marketplace.

Has the additional attention now paid to delegation accelerated the trend towards the concentration of players observed in the marketplace in recent years?

The increasingly stringent regulatory requirements placed on alternative fund managers require a certain size in order to meet them. And the sector is consolidating. If you look at the extremely large local market of investment fund service providers--and I’m including administrative agents, custodians and third-party AIFMs here--you can clearly see a concentration phenomenon, because you need a large workforce to be able to serve this industry.

We are also seeing a drive to develop one-stop-shop solutions, meaning that the same group, via different entities, will want to act as custodian, administrative agent or AIFM. This strategy is attractive to mid-cap clients, who welcome the fact of having a single group as an integrated service provider that can cover all the service lines they need. On the other hand, the managers and promoters of larger funds seem to prefer to spread mandates across different service providers, because they believe that multiplying the players ultimately has a positive impact on the quality of the work and reduces the risk of error.

AIFMD II: an evolution rather than a revolution

The first AIFM Directive came into force in 2011 and had to be transposed by all member states by July 2013. The latter governed the activity of alternative investment fund managers--a legal person whose regular business consists of managing one or more alternative investment funds (AIFs).

In the early 2020s, the European Commission wanted to review this directive, in particular to strengthen investor protection. On 7 February 2024, the council adopted the AIFM Directive, which was published in the Official Journal of the European Union on 26 March 2024. The text modernises the framework governing liquidity management tools, specifies an EU framework for funds that provide credit to companies and introduces strengthened rules applicable to delegation by portfolio managers to third parties.

+59.04%

According to data from the 2024 activity report of the Luxembourg Association of Investment Funds (Alfi), hedge fund assets are growing steadily in Luxembourg. From €625bn in 2016, this had risen to €994bn by the end of 2024, an increase of 59.04%. According to PwC Luxembourg’s 2025 barometer of management companies, 262 managers have an AIFM licence.

This article, originally published in French, was written for the alternative investments supplement to the July 2025 edition of Paperjam magazine, published on 13 June. The magazine content is produced exclusively for the magazine. It is published on the site to contribute to the complete Paperjam archive. Click this link to subscribe to the magazine.

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