LUXEMBOURG Trends and Developments Contributed by: Silke Bernard, Melinda Perera and Adrien Timmermans, Linklaters LLP
Instead, applicable national rules required them to establish multiple structures to offer a solution that worked for each respective target country. AIFMD II and Harmonised Single Market These issues have now been addressed by the revisions to the AIFMD, which were adopted in early 2024 and must be implemented into mem - ber states’ national laws by 16 April 2026. The new rules should represent a game changer for the sector. The new legislation applies to all loan origination funds created from 15 April 2024 onward; those already in existence must comply by 16 April 2029. AIFMD II explicitly authorises alternative invest - ment fund managers to lend on a cross-border basis, subject to certain constraints, ensuring the ability to establish true cross-border pan- European direct lending or private credit funds in Luxembourg and other European Economic Area member states. This should address issues in those member states which so far had not recognised loan origination as a type of invest - ment activity and/or restricted it under national legislation. The new directive formally recognises loan- originating AIFs as funds that provide credit as a primary investment activity, and provides a harmonised framework across the EU to curb regulatory differences. The rules incorporate provisions intended to promote financial stabil - ity and reduce systemic risk as well as ensuring protection for investors in the funds. Under the new framework, the funds must retain at least 5% of the notional value of loans they originate in the event of a subsequent transfer, in order to avoid moral hazard and align fund sponsors’ interests with those of investors, and discourage risky lending practices.
Also, to restrict excessive risk-taking, AIFMD II introduces leverage limits for loan-originating AIFs, of 300% of net asset value for closed- ended funds and 175% of NAV for open-end - ed funds, to mitigate systemic risk and ensure funds have adequate capital buffers. Concentration risk is addressed by lending diversification requirements, under which a sin - gle borrower that is a UCITS or alternative fund, bank or insurer cannot receive more than 20% of a fund’s capital, subject to certain excep - tions. AIFMD II also restricts loan-originating funds from engaging in originate-to-distribute business models, under which loans are rapidly sold on, to prevent the phenomenon of credit risk transfer that played a significant role in pre - cipitating the global financial crisis. Managers of loan-originating AIFs are required to conduct rigorous credit assessments before issuing loans and to adopt sound credit policies, conduct due diligence on borrowers, and moni - tor loans following their disbursement. Many of the new requirements under AIFMD II for loan-originating funds reflect in essence the standards Luxembourg has applied for many years already, and it is expected that – with some nuances – the Luxembourg funds industry should be well prepared for the new framework. The delegated acts under AIFMD II are still in the making, and hence final details will still take a while before they are ultimately confirmed. Liquidity Management Requirements for Open-Ended Funds Because of the illiquid nature of their assets, the AIFMD II legislation restricts the creation of open-ended loan origination funds to ensure that redemptions do not lead to forced distressed asset sales that hurt the interests of investors
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