The AIFMD 2 introduces new rules for loan-originating AIFs, but uncertainties remain around the potential for a cross-border “lending passport,” writes Sebastiaan Hooghiemstra, senior associate at Loyens & Loeff Luxembourg in his latest contribution as member of Investment Officer’s expert panel.
On 26 March 2024, the final legislative text of the directive amending Directive 2011/61/EU was published in the Official Journal of the EU (“AIFMD 2”). Whilst AIFMD 2 does not completely overhaul the AIFMD framework, it does raise a number of noteworthy changes. One of those are the new rules for loan-originating alternative investment funds (“LO-AIFs”), AIFs which originate loans (“AIFs-WOL”) and alternative investment fund managers (“AIFMs”) managing AIFs-WOL (“LO-AIFMs”). This contribution discusses the uncertainties in relation to the “AIFMD 2 lending passport”.
Background
Arguably, the AIFMD 2 regime for AIFs-WOL was the topic that most of us were looking forward to when the AIFMD 2 text came out. The new rules for LO-AIFMs under AIFMD 2 to manage AIFs-WOL and LO-AIFs under AIFMD 2 addresses current concerns in terms of diverging national regulatory approaches, as well as micro- and macro-prudential risks. Although the AIFMD 2 Recitals seem to indicate that loans may be originated on a cross-border basis, the text does not have any clarification that sets aside European banking law requirements (“CRD”), which leaves room for individual Member States to “goldplate” and demand for top-up requirements.
Albeit such a passport seems not to have been formally introduced, the view can be taken that the AIFMD 2 framework provides sufficient comfort in terms of investor protection and systemic risks for Member States to either tacitly agree upon a (“de facto”) “AIFMD 2 lending passport” or for the European legislator to provide legal certainty with introducing an “AIFMD 2 lending passport” on the basis of “Annex I AIFMD 2” in future iterations of AIFMD 2.
Banks versus LO-AIFs
Ever since LO-AIFs started to step into the domain of lending to SMEs, LO-AIFs have been compared with banks (i.e. credit institutions). One of the points that always surprised me was that very few policy makers and academics have a sufficient holistic overview of the regulatory principles of both investment funds and banking law. Commercial banking is based upon attracting capital short and lending long. Often it has been argued that LO-AIFs nor their (LO-)AIFMs are subject to capital requirements and, therefore, are not as heavily regulated as banks.
“The AIFMD 2 framework provides a sufficient degree of comfort for individual Member States to either tacitly agree upon a (“de facto”) “AIFMD 2 lending passport” or for the European legislator to provide legal certainty with introducing an “AIFMD 2 lending passport.”
Should a “lending passport” be in place?
AIFs-WOL under AIFMD 2 do not pose systemic risks to the same extent as banks under CRD. Nevertheless, AIFs-WOL might prompt some maturity, liquidity transformation and leverage risks. However, it can be argued that AIFMD 2 by adopting certain organizational requirements for AIFMs and product rules in terms of restrictions of investments into financial undertakings, “conflicting entities”, limits on leverage and imposing LO-AIFs to be structured as closed-ended or open-ended with robust liquidity management policies based upon harmonized EU rules adequately considers the specific features and business models of AIFs-WOL compared to banks, as well as the particularities of LO-AIFs. Hence, it can be considered that the AIFMD 2 framework provides a sufficient degree of comfort for individual Member States to either tacitly agree upon a (“de facto”) “AIFMD 2 lending passport” or for the European legislator to provide legal certainty with introducing an “AIFMD 2 lending passport”.
Given the convergence that AIFMD 2 brings in this space, it is, in any case, to be expected that more Member States will open up their markets for cross-border lending LO-AIFs than currently is the case.
Sebastiaan Hooghiemstra is a senior associate in the investment management practice group of Loyens & Loeff Luxembourg and Senior Fellow/Guest Lecturer of the International Center for Financial Law & Governance at the Erasmus University Rotterdam. The law firm is a member of Investment Officer’s expert panel.