Navigating the new frontier: Understanding the impact of AIFMD2 on EU Alternative Investment Fund Managers

Introduction  

The European investment landscape witnessed a significant regulatory evolution with the publication of the amendment to the EU Alternative Investment Fund Managers Directive (AIFMD) on 26 March 2024, in the Official Journal of the EU.

The Directive, known as AIFMD2, introduces a series of pivotal changes impacting both non-EU and EU Alternative Investment Fund Managers (AIFMs). This amendment marks a critical juncture, influencing the regulatory framework initially established by AIFMD1 (July 2014).

The primary objective of AIFMD1 was to enhance transparency, protect investors, and mitigate systemic risks associated with alternative investment funds. AIFMD2 is updating targeted elements of the original directive, reflecting years of legislative developments and market feedback with the aim to best protect investors and support market needs. The new directive necessitates that Member States implement these changes into their local laws by 16 April 2026, ushering in new compliance and operational frameworks for AIFMs.

This article explores the main updates applicable to EU AIFMs and discusses their practical implications, including changes to delegation rules, revised authorization and substance requirements, the introduction of loan origination regime mechanism, enhancements to the liquidity management framework, the expansion of permissible activities, and new obligations for depositaries.

The changes on delegation rules 

1. Extension of the delegation framework

The AIFMD delegation rules now apply to the delegation of all functions listed in Annex 1 AIFMD, including ancillary functions such as fund administration, marketing or fiduciary services and the additional “top-up” services for which EU AIFMs may be authorized, which include MiFID top-up activities such as portfolio management, investment advice and custody.

This implies that AIFMs delegating non-core service activities to third-parties will need to assess whether their existing operational staff from the first line of defense are still sufficient and adequate to guarantee an effective ongoing supervision, given the extended scope.
 

2. Extension of the information provided to NCAs authorization

EU AIFMs will be required to provide more detailed information to their National Competent Authority (NCA) on proposed delegation arrangements, including:

• The name, jurisdiction and supervisory authority of each delegate.
• A detailed description of the human and technical resources of the AIFM performing day-to-day portfolio or risk management within the AIFM and monitoring the delegation.
• A short description of the delegated portfolio or risk management function, including whether it amounts to a partial or full delegation.
• The periodic due diligence the AIFM will conduct to monitor the delegation.

This additional data to be provided for NCAs for authorization highlights that the delegation and its oversight are increasingly important topics, and NCAs will need to ensure that newly established AIFMs implement suitable delegation arrangements.
 

3. Annex IV reporting to enhance transparency over delegation arrangements

In Article 24 of AIFMD2, the Annex IV reporting rules have also been expanded. Indeed, AIFMD2 requires Annex IV reports to include details of any delegation arrangements concerning portfolio or risk management, including:

• The name and domicile of each delegate, its close links with the AIFM, whether they are regulated and if so, their supervisory authority.
• The number of full-time equivalent human resources employed by the AIFM to perform day-to-day portfolio management or risk management within the AIFM, and also the number of full-time equivalent human resources that monitor any delegation arrangements.
• A list and description of the delegated activities concerning portfolio management and risk management.
• The amount and percentage of AIF assets that are managed under delegation.
• The number of periodic due diligence reviews carried out by the AIFM, and their dates, as well as a list of issues identified and measures adopted to address them.
• Where sub-delegation arrangements are in place and the information required under the first, third and fifth bullets above in respect of those arrangements.
• Beginning and expiration dates of the delegation and sub-delegation arrangements.

The expansion of the information required in the Annex IV reporting concerning delegation indicates that NCAs will closely monitor the delegation and oversight arrangements established by the AIFMs.

Conflict of interest related to third-party initiators

AIFMD2 amends the conflicts of interest obligation of an EU AIFM in Article 14 AIFMD. In AIFMD2, where an AIFM manages an AIF initiated by a third party, including where the AIF uses the name of a third-party initiator or the AIFM appoints a third-party initiator as a delegate, the AIFM must submit to its NCA detailed explanations and evidence of its compliance with the AIFMD requirements regarding conflicts of interest.

Moreover, it should specify the reasonable steps it has taken to prevent conflicts of interest arising from its relationship with the third party.

EU AIFM authorization and substance requirements

AIFMD2 requires that the business of the AIFM must be conducted by at least two natural persons who are first domiciled in the EU and second either employed full-time or committed full-time to conducting the business of the AIFM.

In this context, AIFMs managing AIFs marketed to retail investors should be “encouraged” to appoint at least one independent or non-executive director, where possible under national law. ESMA is mandated to consider the appropriateness of introducing a binding rule concerning this point.

These requirements strengthens governance within AIFMs by ensuring that key operational roles are filled by individuals who are centrally located within the EU, promoting uniform management practices and adherence to EU regulations. Moreover, having non-executive directors brings independent perspectives to decision-making processes, enhancing management aligning with investor interests.

The introduction of a loan origination regime

One of the key changes under AIFMD2 is the introduction of a loan origination framework.
 

1. “Loan origination” and “loan-originating AIFs”

“Loan origination” is defined as the granting of a loan, either:

• Directly by an AIF as the original lender
• Indirectly through a third part or SPV on the AIF/AIFM’s behalf, where the AIF/AIFM is involved in structuring the loan, defining or pre-agreeing its characteristics.

In this context, “loan originating AIFs” will be AIFs whose investment strategy is mainly to originate loans or whose originated loans have a notional value that represent at least 50% of the AIF’s net asset value.

Under AIFMD2, all AIFs that originate loans should comply with the following rules:

• Loan origination policies: AIFM must implement, maintain and review at least annually its policies, procedures and processes for granting of loans, including for the assessment of credit risk and for administering an monitoring its credit portfolio. This point is subject to a carveout for the origination of shareholder loans, provided their aggregate notional value does not exceed 150% of the AIF’s capital.
• Concentration limits: A lending to any single borrower that is a financial undertaking, an AIF or a UCITS, must not exceed 20% of the AIF’s capital. This limit should enter into force no later than two years following the first subscription for units in the AIF. This requirement does not apply to loans granted to private companies. Nevertheless, the 20% concentration limits do not apply where the AIF is selling assets to meet redemptions or during the liquidation of the AIF. Additionally, it can be temporarily suspended for up to 12 months if the capital of the AIF is increased or reduced.
• Related party lending: AIFs cannot lend to their own AIFM, the AIFM’s delegates or staff, the AIFM’s the depositary or its delegates, or related parties, except for affiliated financial entities that exclusively finance borrowers.
• Consumer lending: Member states have the option to prohibit AIFs from granting loans to consumers and to prohibit AIFs from servicing credits granted to such customers in their territory.
• Originate to distribution: AIFMs are prohibited from managing an AIF that pursues wholly or partly an “originate-to-distribute” strategy. In other terms, AIFMs are not permitted to manage funds that originate loans or financial products for the purpose of selling them to other financial entities or investors. In other terms, AIFMs are not permitted to manage funds that originate loans or financial products for the purpose of selling them to other financial entities or investors.
• Risk retention: If an AIF originates a loan and subsequently sells the loan on the secondary market, it will be required to retain 5% of the notional value of the loan (until maturity for loans with an eight-year term or loans of any maturity granted to consumers or for eight years in any other case). Nevertheless, some derogations apply to the 5% retention rule when the AIFM begins selling the assets of the AIF to redeem units or shares during the liquidation process, when asset disposal is required to comply with sanctions or product requirements, and when loan sales are essential for the AIFM to execute the investment strategy of the AIF in the best interest of the AIF’s investors.
   

2. Additional requirements for “loan-origination AIFs”

Under AIFMD2, EU AIFMs managing loan-originating AIFs must comply with additional requirements:

• Closed-ended fund requirement: These AIFs must generally be closed-ended, unless the AIFM can prove that its liquidity risk management system is compatible with its investment strategy and redemption policy. On 12 December 2024, ESMA published a consultation paper outlining draft regulatory technical standards (RTS) for open-ended loan-originating AIFs. It covers how AIFMs should establish an appropriate redemption policy,  determine an appropriate proportion of liquid assets, run liquidity stress tests, and continuously monitor the open-ended loan-originating AIF they manage remains compatible with its investment strategy and redemption policy on an ongoing basis.
• Leverage limit: Open-ended AIFs are capped at 175% leverage, while closed-ended AIFs can go up to 300%. Leverage is calculated according to the commitment method, excluding borrowing arrangements which are fully covered by contractual capital commitments from investors in the AIF. This limit does not apply to loan-originating AIFs whose lending is limited to shareholder loans, provided that those loans do not in aggregate exceed 150% of the AIF’s capital. In light of this new leverage limits, the AIF should revisit their exposure generated via the borrowing arrangements.
   

3. Grandfathering provisions for AIFs that originate loans 

Some transitional rules (grandfathering provisions) apply to the loan origination rules in order to protect or exempt existing conditions from being affected by new regulations.

AIFMs managing funds that existed before AIFMD2 took effect on 15 April 2024—and that do not raise new capital after this date—will be deemed compliant with the previous requirements of AIFMD1. Moreover, preexisting funds that raise capital after the 15 April 2024 will be grandfathered for a five-year period (i.e. until 16 April 2029) from such date. Since EU Member States are not required to adopt AIFMD2 into national law until 16 April 2026, this grace period effectively gives managers a three-year transition window.

For existing loans, which are loans originated before 15 April 2024, AIFMs will not need to comply with the rules on loan origination policies, related party lending, originate to distribute and risk retention.

Overall, AIFMs will need to adhere to a structured legal framework for loan origination, ensuring compliance with  defined policies and rigorous credit risk assessment protocols. New concentration limits and risk retention requirements will necessitate careful management of lending practices and risk diversification to protect against excessive exposure. In short, AIFMs will need stronger governance and more comprehensive risk management frameworks to remain compliant.

Changes related to liquidity management

AIFMD2 expands the existing liquidity management requirements under Article 16. EU AIFMS must now select at least two liquidity management tools (LMTs) from a prescribed list of nine options—though only eight are available, since the suspension of subscriptions/repurchases/redemptions applies to all AIFs by default.

AIFs must choose at least two of the eight available LMTs, though Money Market Funds only need to select one. Suspension of subscriptions, repurchases, redemptions, and the use of side pockets are restricted to exceptional situations.

Moreover, the AIFM will be required to implement policies and procedures for the activation and deactivation of any selected LMT. Prior to activating or deactivating a LMT, the AIFM must notify its NCA within a reasonable timeframe.

In exceptional cases, NCAs will be able to require the EU AIFM to activate or deactivate the suspension of subscriptions, repurchases and redemptions LMT after consultation with the AIFM. In the same kind of circumstances, ESMA will be empowered to request NCAs to require non-EU AIFMS marketing one or more AIFs in the EU, as well as EU AIFMs managing a non-EU AIF, to activate or deactivate the suspension LMT.

With the additional liquidity management requirements, AIFMs will remain the main responsible for the selection, calibration, activation and deactivation of LMTs. This will affect the governance framework for AIFMs, requiring them to incorporate the aforementioned aspects into an LMT policy, supplementing their existing liquidity risk management procedures.

The liquidity management requirements set out in AIFMD2 share some similarities with those applicable to the European long-term investment fund (ELTIF). While they share fundamental principles of liquidity management, the specifics can differ based on the long-term investment characteristics of ELTIFs.

Conclusion

AIFMD2 has the potential to be seen as an enhancement for the industry with possibility of new service offering and alternative target operating model by continuously leveraging on delegations, while still focusing on investor protection and EU market integrity. Rules applying to the financial market become also more aligned between industries with framework requirements converging in terms of risk and liquidity management and loan origination.

While this article focuses on the changes impacting EU AIFMs, AIFMD2 introduces significant regulatory shifts that affect both EU and non-EU AIFMs. By April 2026, AIFMs are required to adapt their operational and compliance frameworks to align with these new standards. The changes aim to boost transparency, protect investors, and strengthen operational resiliency. EU Member States are expected to adopt the new Directive into national law by that date. In Luxembourg, the CSSF is likely to publish the AIFMD2 law in the next few months.

For EU AIFMs, this entails stricter delegation controls over delegation, enhancing liquidity management practices, and broadening investor disclosure and reporting obligations. Additionally, EU AIFMs must also comply with new governance requirements, including appointing independent or non-executive directors where possible under national law, and ensuring their business operations are conducted by at least two EU-domiciled natural persons.