LUXEMBOURG Trends and Developments Contributed by: Silke Bernard, Melinda Perera and Adrien Timmermans, Linklaters LLP
remaining in the fund. Open-ended loan funds must have the power to implement at least two liquidity management tools, such as redemption gates, notice periods and side pockets, that are appropriate in the light of the liquidity of the debt the funds issue. Again, liquidity management has been an area of focus of the Luxembourg regula - tor even before AIFMD II, and sponsors should be well prepared to answer questions on their liquidity management tools (LMT) framework. From a conflicts of interest perspective, loan- originating funds face stricter requirements regarding related-party transactions, such as lending to affiliated companies or insiders, which must entail independent risk assessments and be disclosed to investors. In addition, national regulators will have enhanced supervisory pow - ers over loan funds, allowing them to impose additional restrictions should a fund’s lending pose systemic risks. The creation of a uniform regulatory framework is intended to ensure that loan-originating AIFs are treated consistently throughout the EEA, reducing the current market fragmentation and easing cross-border fund distribution. The leg - islation is designed to facilitate wider access for borrowers throughout Europe to loan origination funds, while promoting prudential risk manage - ment, investor protection and financial stability. Private Wealth Demand for Lending Strategies Until recently, investors in direct lending funds have mostly come from the institutional side, but direct lending funds and other structures are starting to be distributed to private wealth investors, through vehicles such as ELTIFs and Luxembourg Part II funds. To ensure adequate investor protection, additional investor protec -
tion safeguards have been built into the legisla - tion for open-ended funds. As with other types of investors that have flocked to alternative investment strategies in recent years, wealthy private individuals and families have started showing appetite to embrace private credit in order to enhance return opportunities, in response to more than a decade of depressed returns from mainstream fixed-income securities, as well as the shrinking of public equity markets worldwide. During discussions over revisions to the AIFMD, the European Commission initially sought to exclude the creation of open-ended loan origi - nation funds, because of the risk of liquidity mis - matches. It was following lobbying from Europe - an fund industry groups – in which Luxembourg was an important voice – that the Commission ultimately accepted open-ended funds under certain conditions. There is also growing appetite in the market for impact credit funds, such as social impact funds, microfinance funds and other socially focused credit investments. This area of the pri - vate credit sector, like other types of sustain - able finance, is currently waiting for decisions from the EU institutions on the future shape of the Union’s ESG framework, following the Euro - pean Commission’s proposals for revision of the Sustainable Finance Disclosure Regulation, but there are signs of investor appetite for credit investment that incorporates environmental and social impact dimensions. Competition With Banks and Collaboration The emergence of funds in the provision of credit now encompasses all types of financ - ing – in some areas taking over shares of the market from banks, or entering into competition
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