AIFMD II is set to take effect in the European Union on April 16, 2026, following its publication in the Official Journal of the EU in March 2024 and entry into force on April 15, 2024. This directive represents an evolution of the existing EU AIFMD, introducing targeted amendments rather than a complete overhaul. Key updates focus on loan origination, liquidity management tools for open-ended funds, and enhanced delegation and substantive staffing requirements.
While AIFMD II does not directly apply to non-EEA AIFMs, many of its provisions remain relevant, particularly regarding marketing in the EEA and delegation functions with EEA full-scope AIFMs. This article includes an assessment of the potential impact on UK firms, including AIFMs and delegated portfolio managers.
The key objectives of AIFMD II:
- Strengthen delegation and ensure substantive staffing requirements.
- Establish harmonised rules for loan origination by alternative investment funds (“AIFs”).
- Enhance liquidity risk management tools for open-ended funds.
- Improve cross-border access to depositary and custody services.
- Standardise supervisory reporting and reduce duplication.
- Integrate sustainability (ESG) risks into governance and risk management.
Key changes introduced by AIFMD II
1. Loan Origination
AIFMD II looks to harmonise rules within the EU in regard to AIFs that originate loans as their main activity – this applies where originated loans account for at least 50% of the AIF’s Net Asset Value. New rules include:
- Leverage limits: 175% for open-ended AIFs and 300% for closed-ended AIFs.
- Risk retention: AIFMs must retain at least 5% of the notional value of each originated loan.
- Single borrower limit: Restrictions on lending to single borrowers who are other AIFs, UCITS, or financial institutions.
- Conflicts of interest: Prohibition on lending to governing bodies or connected parties of the AIFM.
There will be a five-year grandfathering period for existing loan-originating AIFs that do not raise additional capital after the effective date.
2. Liquidity Management Tools
Under AIFMD II, managers of open-ended AIFs (including illiquid open-ended funds) must select at least two liquidity management tools (“LMTs”) from a prescribed list in Annex II, or one tool if the money market fund derogation applies, aligned with the fund’s investment strategy. Firms are required to establish detailed policies and procedures governing the use of these tools, as follows:
- Suspension of subscriptions, repurchases and redemptions: this means temporarily disallowing the subscription, repurchase and redemption of the fund’s units or shares.
- Redemption gate: this means a temporary and partial restriction of the right of unit-holders or shareholders to redeem their units or shares, so that investors can only redeem a certain portion of their units or shares.
- Extension of notice periods: this means extending the period of notice that unit-holders or shareholders must give to fund managers, beyond a minimum period which is appropriate to the fund, when redeeming their units or shares.
- Redemption fee: means a fee within a predetermined range that takes account of the cost of liquidity, that is paid to the fund by unit-holders or shareholders when redeeming units or shares, and that ensures that unit-holders or shareholders who remain in the fund are not unfairly disadvantaged.
- Swing pricing: means a pre-determined mechanism by which the net asset value of the units or shares of an investment fund is adjusted by the application of a factor (“swing factor”) that reflects the cost of liquidity.
- Dual pricing: means a pre-determined mechanism by which the subscription, repurchase and redemption prices of the units or shares of an investment fund are set by adjusting the net asset value per unit or share by a factor that reflects the cost of liquidity.
- Anti-dilution levy: means a fee that is paid to the fund by a unit-holder or shareholder at the time of a subscription, repurchase or redemption of units or shares, that compensates the fund for the cost of liquidity incurred because of the size of that transaction, and that ensures that other unit-holders or shareholders are not unfairly disadvantaged.
- Redemption in kind: means transferring assets held by the fund, instead of cash, to meet redemption requests of unit-holders or shareholders.
- Side pockets: means separating certain assets, whose economic or legal features have changed significantly or become uncertain due to exceptional circumstances, from the other assets of the fund.
Where necessary, firms may also implement additional tools not on the list to manage liquidity risk effectively. Investors must be informed about the LMTs in use, and any changes to liquidity management must be reported to the firm’s regulator.
3. Staffing arrangements
AIFMD II introduces stricter “substance” requirements for newly authorised AIFMs. Each firm must appoint at least two senior managers who reside in the EU, work full-time for the business, and possess the necessary skills and expertise to perform or oversee retained functions. As part of the authorisation process, firms must provide detailed information about these individuals, including:
- Their role, title, and level of seniority;
- Reporting lines and responsibilities within and outside the AIFM;
- The amount of time allocated to each responsibility; and
- A comprehensive description of the human and technical resources supporting their activities.
4. Delegation
AIFMD II expands disclosure and reporting obligations for newly authorised firms regarding their delegation arrangements. An AIFM remains responsible to the AIF and its investors even when functions are delegated or sub-delegated. Any sub-delegation requires the AIFM’s explicit written consent (general pre-approval is insufficient). The consent must provide terms related to rights of access, inspection, monitoring, and termination.
Any delegation must be objectively justified, such as providing cost efficiency, specialist expertise, or trading access. The AIFM’s home regulator must be notified before any delegation or sub-delegation takes effect. Where delegation involves a non-EU firm, it can only occur if cooperation agreements exist between the relevant regulators.
The delegation requirements under AIFMD II extend beyond portfolio and risk management to include administration, marketing and asset-related activities. When notifying the regulator about delegated functions, firms must provide detailed information, including:
- The legal name, relevant identifier, jurisdiction of establishment and, where relevant, the supervisory authority of the delegate;
- A detailed description of the resources employed by the AIFM for performing day-to-day portfolio or risk management tasks within the AIFM and for monitoring the delegated activity;
- In respect of each AIF the AIFM manages or intends to manage, a brief description of the delegated portfolio management and risk management functions, including whether the delegation amounts to a partial or full delegation; and
- A description of the periodic due diligence measures to be carried out by the AIFM for monitoring the delegated activity.
There is a likely expectation that existing authorised AIFMs will adhere to these notifications. The delegated activities will also be expected to comply with the requirements of AIFMD.
Where an AIFM has been delegated to manage an AIF at the initiative of a third party, the AIFM managing the third-party AIF will need to provide their local regulator with a detailed explanation of how they will manage any potential conflicts arising from the third party.
5. Depositary passporting
AIFMD II introduces limited flexibility for appointing a depositary outside the AIF’s home member state. This option is subject to strict conditions and prior approval from the local regulator. It is not a full depositary passport; rather, it applies only where the AIFM can demonstrate that no suitable local depositary is available to meet the fund’s needs in line with its investment strategy. Additionally, the assets held by the appointed depositary must be below €50 billion, and the regulator will review and approve each request.
6. Additional services
The range of Markets in Financial Instruments Directive (“MiFID”) II services available to AIFMs has been broadened under AIFMD II. This now includes the ability to provide credit servicing in line with the Credit Servicers and Credit Purchasers Directive, as well as benchmark administration under the Benchmark Regulation. The Directive also clarifies the MiFID “top-up” provisions for AIFMs wishing to conduct MiFID-regulated activities. In practice, however, these changes are expected to have minimal impact, as most requirements are already implemented through local regulation.
7. Investor and regulatory reporting
New investor disclosure requirements under AIFMD II will provide greater transparency on costs and portfolio composition. Firms must clearly report all fees, charges and expenses, as well as details of the loan portfolio. These disclosures will also cover any changes to the fund’s liquidity management framework. In addition, Annex IV reporting to regulators will become more detailed, requiring increased granularity in the information submitted to regulators.
8. Sustainability integration
AIFMs are required to embed ESG risks within their governance and risk management frameworks. They must also demonstrate compliance with Sustainable Finance Disclosure Regulation (“SFDR”) obligations, which (currently) include publishing their SFDR credentials on their websites and showing how sustainability considerations are integrated into investment decision-making.
General requirements for non-EU AIFMs and depositaries
AIFMD II introduces new marketing and regulatory reporting obligations under the National Private Placement Regime (“NPPR”) for non-EU AIFMs. Marketing within the EU will only be permitted if specific conditions are met, including:
- The firm is not established in a “high-risk third country.”
- Compliance with applicable tax information exchange agreements.
- Fulfilment of expanded regulatory reporting requirements covering asset and market-related data.
Additionally, third-country depositaries must comply with AIFMD II standards. If they cannot meet these requirements, the AIF will need to transition to a depositary that can fulfil the obligations.
Impact on UK AIFMs and portfolio managers
Following Brexit, AIFMD II does not apply directly to UK AIFMs. However, firms marketing into the EU must comply with updated third-country requirements under the NPPR. Key considerations include:
- Ensuring a tax information exchange agreement exists with each EU member state where marketing occurs; and confirming the UK is not listed as a non-cooperative jurisdiction (not currently an issue, nor expected to become an issue).
- Observing new pre-marketing rules that may apply in certain member states.
- Meeting expanded Annex IV reporting obligations, which now require more detailed data on delegation, markets, instruments, exposures, and assets.
Non-EU AIFMs should review their marketing strategies, particularly for new funds, given the evolving regulatory landscape and the need for ongoing reporting in any member state where investors remain invested.
Firms should also disclose the composition of originated loan portfolios for each loan-originating AIF. While AIFMD II does not apply to UK firms, there may be an expectation to include LMTs in investor disclosures. Additionally, firms must ensure pre-contractual information includes the fund name and verify compliance with European Securities and Markets Authority (“ESMA”) guidelines to avoid names that are “unfair, unclear, or misleading.”
Furthermore, where functions are delegated to a UK Manager from an EU AIFM, the EU AIFM will need to ensure that the delegate adheres to the AIFMD II delegated requirements of the EU AIFM, which includes that remuneration by the delegate firm comply with AIFMD requirements. This may require that delegated agreements are reviewed in the light of AIFMD II.
Finally, AIFMD II requires transparency on all fees, charges and expenses borne by the AIFM or allocated to the AIF. Firms should confirm that each cost is (i) approved by the fund’s governing body, (ii) reflected in relevant agreements and incorporation documents, and (iii) clearly disclosed to investors.
Conclusion
AIFMD II is an evolutionary development in the regulatory framework for alternative investment funds. It introduces significant enhancements in areas such as loan origination and liquidity management, while also strengthening transparency requirements for investor disclosures and regulatory reporting.
If you would like support interpreting these developments or assessing their impact on your business, please reach out to our team for our guidance and assistance.
