It will not be news to readers of this article that allocations to funds investing in private assets, and in particular private credit, have seen strong and sustained growth over recent years and are expected to continue as a key trend in asset allocation globally. In the recently published Funds Sector 2030, A Framework for Open, Resilient and Developing Markets (the Report), the Irish Government’s Department of Finance expressly recognised that the continued growth in private markets presents significant opportunities for Ireland as a jurisdiction noting that “Ireland’s funds and asset management sector has deeper skills and experience in private assets than is often understood, with a strong track record in supporting private credit funds and other private asset funds domiciled in other jurisdictions”. The Report noted that recent EU regulatory developments through the implementation of AIFMD II and the recent updates to the ELTIF Regulation are set to level the playing field across the EU for those funds engaging in loan origination and those seeking to access a broader investor base for long term investments.

In this article we will look at some of these developments and how regulated Irish fund structures and the existing Irish asset management and investment funds ecosystem might be utilised to house private credit assets and access EU markets.

A New Harmonised Loan Origination Framework under AIFMD II
One of the most notable aspects of AIFMD II is the introduction of a pan-European framework for AIFMs and the alternative investment funds (AIFs) they manage engaging in loan origination activities. Until now direct loan origination by investment funds has largely been subject to the requirements of individual EU Member States. AIFMD II introduces a common set of rules for such AIFs addressing leverage, liquidity, risk mitigation and the financial stability risks associated with the growth of this sector.

The first notable and welcome development under AIFMD II is the establishment of an EU passport for AIFMs engaging in the new standalone activity of “Originating loans on behalf of an AIF” under Annex I of AIFMD. This means that once the rules begin to apply in 2026, an EU-authorised AIFM will be able to benefit from passporting rights so that an AIF managed by it can lend to permitted borrowers established in another EU Member State without being required to obtain local permissions to do so.

Secondly, AIFMD II has helpfully recognised that there are distinct categories of AIFs pursuing strategies incorporating loan origination by introducing the concepts of (i) a fund which “engages in loan origination” (or “originates a loan”) and (ii) a “loan-originating AIF”. Importantly, the new framework under AIFMD II recognises that while there will be funds that engage in the activity of loan origination on an ancillary basis, where this type of investment is not a core element of the fund’s strategy, such funds should be categorised under the new framework as “funds which engage in loan origination” and should be distinguished from “loan-originating AIFs”. Under the new rules, “loan-originating AIFs” are AIFs whose investment strategy is mainly to originate loans or where the notional value of the AIF’s originated loans represents at least 50% of its net asset value.

The distinction between a fund that engages in loan origination and a fund which meets the criteria of a “loan-originating AIF” is important. The full suite of loan origination rules under AIFMD II will only apply to loan-originating funds. Therefore, where an AIF is not a “loan originating AIF” for the purposes of AIFMD II, while it will be subject to some of the new rules it will not be required to comply with all of them.

The new framework will therefore impose in the EU a new common set of rules for private credit funds engaging in loan origination or operating as “loan-originating AIFs” as regards liquidity, permitted levels of leverage, risk mitigation measures and which detail the processes, policies and procedures that AIFMs will be required to establish and maintain with respect to their loan origination activities.

For example, while the default position under AIFMD II is that “loan-originating AIFs” should be closed-ended, it will be possible to establish a “loan-originating AIF” as an open-ended fund provided that certain conditions are met, including ensuring that an appropriate liquidity management system is in place. Any “loan originating AIF” will be subject to leverage limits (utilising the commitment approach) depending on whether it has been established as open-ended (175% leverage limit) or closed-ended AIFs (300% leverage limit). More broadly AIFMD II imposes a suite of risk mitigation measures to address financial stability risks related to such non-bank lending activities including imposing risk retention requirements (5% of the notional value of any loan originated by it), concentration limits when lending to financial institutions (20% of NAV), a prohibition on lending to the AIFM or related persons or entities and prohibiting lending on the basis of an “originate to distribute” strategy.

The new rules do permit EU Member States to impose more restrictive measures with respect to loan origination and “loan-originating AIFs”. For example, the new rules permit individual EU Member States to prohibit loan origination by an AIF directly to consumers and from servicing loans to such consumers in that Member State. It will be interesting therefore to see whether the national competent authorities of all EU Member States will remain faithful to the finalised agreed legislative text or whether any individual Member State will choose to supplement or “gold plate” the new rules with additional domestic provisions.

From an Irish perspective the Central Bank has confirmed that it intends to align its rules as regards AIFs engaging in loan origination with AIFMD II and the Department of Finance has confirmed in the Report referred to above that the Central Bank will issue a public consultation on potential changes to its AIF Rulebook as part of the transposition of AIFMD II and will continue its engagement with industry as work on the transposition progresses.

Loan Origination under the ELTIF Regime
AIFMD II is not the only pathway forward for the establishment of Irish funds investing in private credit assets. ELTIF 2.0 also brings with it a significant new opportunity for Ireland as a domicile for private credit funds engaging in loan origination. The Central Bank has had strong and proactive engagement with industry as regards the implementation of ELTIF 2.0 and has established an Irish ELTIF regime which makes use of the advantages of Irish fund structures and the flexibility in the Central Bank’s approval processes while not gold plating ELTIF 2.0 by imposing any additional domestic requirements on Irish-domiciled ELTIFs.

As readers may know, the new and improved ELTIF regime is intended to provide a bespoke regulated fund structure designed to support the funding and development of the EU’s real economy. The focus of ELTIFs is investment in long-term assets in the real economy including through direct loan origination activities. ELTIFs are permitted to lend to “qualifying portfolio undertakings” or “QPUs” (which includes unlisted undertakings or listed SME undertakings with a market cap of no more than Euro 1.5 billion but does not, subject to certain exceptions, include “financial undertakings” such as banks, insurance companies or investment managers). Particularly helpful is the fact that QPUs can be established in either (i) an EU Member State or (ii) a third country which does not appear on the EU black-list and which is not a “high-risk” country under EU AML laws – an attractive prospect for both EU and non-EU managers looking to provide investors with access to global private credit opportunities.

It is worth noting that the Central Bank allows the establishment of an ELTIF sub-fund within umbrella structures. Such umbrella schemes benefit from segregated liability between the relevant sub-funds and bring significant economies of scale and increased speed to market when compared with costings and timing implications involved in establishing separate legal structures for each strategy/category of investor.

It is therefore no surprise that in the short time since implementation of ELTIF 2.0, the majority of ELTIFs in Ireland have been established as part of existing umbrella structures and are engaging in loan origination, a testament to the suitability of such vehicles for private credit strategies.

However, perhaps one of the most attractive aspects of the revised ELTIF structure for private credit managers is the fact that it is the only type of fund dedicated to long-term investments that can be distributed across borders in the EU to both professional and retail investors. As an ELTIF is an EU AIF with an EU-authorised AIFM, an Irish ELTIF can be sold anywhere within the EEA by either the ELTIF’s EU AIFM itself or by an appropriately regulated local distributor or placement agent.

Clearly the possibility of marketing Irish ELTIFs engaged in loan origination strategies to a broader investor base outside of professional investors through the European passport model is very attractive particularly in light of the track record of Ireland as a jurisdiction which supports the distribution strategy of managers seeking to access professional and retail markets throughout the EU.

Conclusion
Given the broad stakeholder support for the development of Ireland as a jurisdiction for private asset funds, the lack of gold plating by the Central Bank in its implementation of ELTIF 2.0 and its anticipated implementation of AIFMD II and the acknowledged capacity and expertise of the asset management and servicing sector in supporting private asset funds, there has never been a better time for promoters to consider Ireland as a jurisdiction of choice for the establishment of regulated private credit funds.