Contributing Firms:
Loan Origination Funds
The proposed update for the Alternative Investment Fund Managers Directive (AIFMD) includes changes regarding Loan Origination Funds that will help to eliminate some of the inconsistencies around the fund type across the EU. In a new departure for AIFMD, for the first time it includes rules at a product level (rather than a fund manager level) - introducing rules around leverage and risk retention for Loan Origination Funds. What are your views on these developments and the potential for the changes to boost the use of Loan Origination Funds?

Gerry Brady, Independent Non-Executive Director & Consultant: Since the Global Financial Crisis (GFC), banks have become more dysfunctional and have moved away from their traditional role (and indeed raison d’?tre) of being the lender of choice, particularly for commercial developments.
Gerry Brady
Gerry Brady

This is very evident in Ireland where it is clear that the vast majority of commercial development since the GFC has been funded by international investment funds. As with Covid and its long-term, continued impact on office-working being replaced by hybrid working, it is not clear that banks will ever resume their traditional role as lender of choice.

Clearly it is essential that there are viable options available for credit and it is important that our regulations play a much needed but proportionate role in the continued development of the ‘shadow banking’, investment funds industry. The current constraints for loan origination funds, particularly in terms of leverage limits, which are significantly more penal than the leverage limits followed in practice by the most conservative banks, are to the detriment of this industry and indeed the development of sectors of our economy dependent on the availability of funding.

The changes outlined in the proposed update to AIFMD are to be welcomed and hopefully we will arrive at a position where there is a balanced and transparent approach to the regulation of our growing shadow banking industry in Ireland and elsewhere.

Mark White, Partner and Chair, McCann FitzGerald LLP: On 13 November 2023, the European Commission (the “Commission”) published the final compromise text amending AIFMD (AIFMD II). The publication of the text of AIFMD II signifies the conclusion of the technical trialogue and consultations between the Commission, the Council of the European Union and the Parliament. AIFMD II is likely to come into effect sometime in early 2026, so it is still some way off.
Mark White
Mark White

While AIFMD II is considered to be relatively benign, by EU Directive standards, with thankfully very little changing in key areas such as delegation, the most notable change under AIFMD II is the introduction of a pan-European loan origination regime for alternative investment fund managers (AIFMs) and the alternative investment funds (AIFs) they manage. Despite the fact that these are new requirements, it is helpful that AIFMD now expressly permits loan origination as an investment activity of an EU AIFM.

While EU Member States have, to date, approached loan origination quite differently (with Ireland being one of the few jurisdictions to have a set of product rules governing funds which originate loans), the creation of a level playing field across the EU, together with a form of passport for loan origination funds, is broadly a welcome introduction, unless you are an EU Member State which currently has an active loan origination industry which is not currently subject to rules.

From an Irish perspective, given that the Central Bank of Ireland’s loan origination rules are more restrictive than what is proposed under AIFMD II, the Irish funds industry is optimistic about the introduction of this new regime under AIFMD II and what it might mean for Ireland as a domicile for loan origination funds.

Fergus McNally, Partner, EY: In 2015 the CBI introduced one of Europe’s first tailored regulatory regimes for loan originating funds, which included rules around leverage and risk retention.

The EU Council now has a proposal in the AIFMD update to impose a leverage cap on funds which engage in loan origination, the ability for such funds to be structured as open-ended and the precise scope of the rules for any funds engaging in loan origination activities.

The CBI have stated that they “will move to align the provisions of our domestic framework with that of AIFMD 2” which would level the playing field for the burgeoning private credit space in Ireland, and we would expect to result in growth of these funds in Ireland.