Loan origination is the most detailed topic in the Council position, in which the amendments and additions to the AIFMD are somewhat different from those in the Commission proposal and the European Parliament draft report, although there is convergence on some provisions. The amendments and changes included in the Council position are as follows.

The Council position includes a new definition of capital: capital means aggregate capital contributions and uncalled committed capital, calculated according to amounts investable after the deduction of all fees, charges and expenses that are directly or indirectly borne by investors.

Other definitions include:

Loan origination means granting of loans by an AIF as the original lender.

A shareholder loan means an advance on the current account granted by an AIFs to an entity in which it holds directly or indirectly at least 5 % of the capital or voting rights, and which cannot be sold to third parties independently of the capital instruments held by the AIF in the entity.

A leveraged AIF means an AIF whose exposures are increased by the managing AIFM, through the borrowing of cash or securities, leverage embedded in derivative positions, or by any other means.

Regarding the implementation of effective policies, procedures and processes, AIFMs that perform loan origination or purchase loans from third parties shall also implement effective policies, procedures and processes for assessing credit risk and administering and monitoring their credit portfolio, keep those policies, procedures and processes up to date and effective, and review them regularly, at least once a year. The Council position refers to loan origination, as does the European Parliament draft report, but the Commission proposal does not. The Council position is the only one referring to the purchase of loans in this provision. Member states may determine that this requirement should not apply to the origination of shareholder loans, as in the European Parliament draft report but with different thresholds, provided that these shareholder loans:

• Do not exceed in aggregate 100% of the AIF’s capital, or
• Are granted to portfolio entities that acquire and manage real estate or participations in real estate companies, and in which the AIF directly or indirectly holds 100% of the capital or voting rights. This requirement should apply on a look-through basis to underlying assets controlled directly or indirectly by the AIF or the AIFM acting on the AIF’s behalf.

An AIFM shall ensure that loans (the singular is used in both the Commission proposal and European Parliament draft report) granted to any single borrower by an AIF it manages do not exceed 20% of the AIF’s capital where the borrower is one of the three types of entity mentioned in the Commission proposal and European Parliament draft report.

To determine compliance with this restriction, the AIFM should combine loans originated by the AIF it manages and the AIF’s loan exposures obtained through an SPV that originates loans for or on behalf of the AIF or AIFM in respect of the AIF. Neither the Commission proposal nor the European Parliament draft report refers to SPVs.

An AIFM shall ensure that the leverage of a loan originating AIF it manages represents no more than 150% of the AIF’s NAV. The leverage should be expressed as the ratio between the AIF’s exposure calculated according to the commitment method defined by delegated acts adopted by the European Commission and its NAV. Borrowing arrangements that are temporary in nature and are fully covered by contractual capital commitments from investors in the AIF should not be considered as constituting leverage for the purposes of this provision. The requirement shall apply to AIFs that gain exposure to a loan through an SPV which originates a loan for or on behalf of the AIF or of the AIFM in respect of the AIF. However, member states may determine that this restriction on leverage should not apply to AIFs whose lending activities consist solely of originating shareholder loans, provided that the loans:

• Do not exceed in aggregate 100% of the AIF’s capital, or
• Are granted to portfolio entities that acquire and manage real estate or participations in real estate companies and in which the AIF directly or indirectly holds 100% of the capital or voting rights. This requirement should apply on a look-through basis to underlying assets controlled directly or indirectly by the AIF or the AIFM acting on the AIF’s behalf. The private equity and real estate fund sector would welcome the adoption of this derogation in national law.

This provision relating to the leverage of loan originating AIFs is also new compared with the Commission proposal and the European Parliament draft report.

The investment limit of 20% should apply by the date specified in the rules or instruments of incorporation or prospectus of the AIF, but it should not exceed 24 months from the date on which the AIF first offers subscription to its shares. Neither the Commission proposal nor the European Parliament draft report mentions a limit for the application date of the investment limit.

The AIFM shall ensure that an AIF does not grant loans to:

• The AIFM or its staff.
• The AIF’s depositary and its delegates.
• An entity to which its AIFM has delegated functions under article 20 and the staff of this entity.
• An entity within the same group, meaning a parent undertaking and all its subsidiary undertakings, unless the entity is a financial undertaking that exclusively finances borrowers excluding those mentioned above. This list of entities is almost identical to that in the European Parliament draft report, but the third exception is exclusive to the Council position.

Member states may prohibit AIFs from granting loans to consumers on their territory, but this shall not affect the marketing of AIFs engaged in consumer lending in the EU. The consumer is defined by reference to article 3(a) of Directive 2008/48/EC (Consumer Credit Directive) as an individual who, in transactions covered by the directive, is acting for purposes outside their trade, business or profession. Neither the Commission proposal nor the European Parliament draft report offers such an option to member states.

An AIFM shall not manage an AIF whose investment strategy, as specified in its rules, instrument of incorporation and prospectus, is to originate loans or gain exposure to loans through an SPV that originates a loan for or on behalf of the AIF or AIFM in respect of the AIF, with the sole purpose of transferring the loans or exposures to third parties (originate-to-distribute). The same provision is included in the European Parliament draft report, except for the reference to originating loan SPVs, but not in the Commission proposal.

An AIFM shall ensure that the AIF it manages retains, for two years from the signature date or until maturity, whichever is shorter, 5% of the notional value of the loans it has originated, or purchased from an SPV that originates loans for or on behalf of the AIF or AIFM in respect of the AIF, and subsequently sold to third parties. This requirement does not apply where:

• The AIF starts selling assets to redeem investors’ units or shares as part of the wind-down of the AIF.
• The borrower or any of its shareholders are subject to EU sanctions, or
• The sale of the loan is necessary for the AIF to avoid breaching one of its investment or diversification rules, where this potential breach would exist for reasons beyond the control of the AIF and of the AIFM that manages it, or as a result of the exercise of subscription or redemption rights.

The 5% minimum retention requirement is removed in the European Parliament draft report. The Commission proposal does not include any of the derogations provided above and does not limit such a requirement to two years.

The following transitional period is added: AIFMs, insofar as they manage AIFs that originate loans and that were constituted before the date of adoption of AFIMD II, may continue to manage these AIFs without complying with point (d) of article 15(3), paragraphs 4a to 4f of article 15 and article 16(2a) of the directive until five years after the date of adoption of AIFMD II. These articles relate to new provisions regarding loan originating AIFs. Loan-originating AIFs constituted before the date of adoption of AIFMD II and that do not raise additional capital shall be deemed to comply with these articles.

Access the European Council position of June 2022 here.