Navigating AIFMD II: Implications for Fund Managers

A 2025 update on the new EU legislation.

The EU alternative fund market was worth close to €7trn at the end of 2022, 30% of the global total — but European policy makers are keen that further growth doesn't come at a risk to financial stability. Step forward AIFMD II.The European Union’s first attempt at a comprehensive regulatory framework for hedge funds, private equity, real estate funds, and other outfits — the groups which collectively make up the Alternative Investment Fund Managers (AIFM) sector — was the 2011 Alternative Investment Fund Managers Directive.AIFMD was part of the coordinated global regulatory response to the 2008 Financial Crisis and as such dealt with issues like counterparty risk, financial stability, and investor protection. Following extensive consultation by national governments its next iteration — AIFMD II —will be transposed into member state national law by 16 April 2026. The European Commission has made a number of new requirements for EU AIFMs in areas such as: delegation agreements, liquidity risk management, regulatory reporting, the provision of custody and depositary services and lending by alternative investment funds in the trading bloc (EU AIFMs).Due to their roles as fund managers, AIFMD II did not include any rules about AIF’s capital.The European Parliament adopted the proposed text of AIFMD II on 7 February 2024 which was published in the Official Journal of the European Union on 26 March 2024 and entered into force on 15 April 2024.It’s the second major regulatory change for AIFMs in two years following the introduction of the The Markets in Crypto-Assets Regulation (MiCA) in 2024. AIFMD II also forms part of a strategic move to deepen the EU’s capital market union and increase investor protection.“AIFMD II represents a significant evolution in the regulatory landscape for alternative investment funds in Europe.AIFMD II does not seek to overhaul the entirety of AIFMD but instead has sought to make targeted amendments to areas under AIFMD,” said Apex Group, an asset services provider.

AIFMD II key amendments: Delegation

AIFMs use of delegation, or to use the mainstream term: ‘outsourcing’, has been in EU authorities' sights since Brexit at the end of 2020, and is the subject of one of AIFMD’s targeted amendments.The UK’s exit from the trading bloc means that a major chunk of European alternative fund management company's portfolio management sits in London — or outside the purview of EU national competent authorities.The latest version of the directive which the European Parliament has signed off aims to change this (Article 20) and increase the EU's oversight of its financial system.AIFMD II increases oversight of delegation arrangements by the AFM’s relevant national competent authority (NCA), typically the one in their home member state, on 16 April next year (article 23).“In terms of data collection and provision, EU AIFMs will be required to provide its NCA with a new set of information on its delegation arrangements during its authorisation process.This information will cover delegation details, resources, detailed policies, delegated functions, and details on due diligence for an alternative fund management company',” lawfirm Zielder Group said.Article 20 makes clear that tasks can't be delegated to letter-box entities. The fund manager must be able to demonstrate that the delegate is qualified and capable of undertaking the functions.

Key amendments: Reporting

AIFMD II also introduces changes (article 24) for regular reporting to national competent authorities, which affect both EU AIFMS and non-EU AIFMs under national private placement regimes, in addition to the delegation rules previously mentioned.The new rules of the amending Directive will come into effect two years after their 15 April 2024 approval by the European Parliament, with reporting requirements and detailed policies and stronger investor protection coming into force one year later.An EU alternative fund management company will need to provide national competent authorities with information on instruments and markets it actively trades, the total amount of leverage employed by the AIF, and a list of member states in which the units or shares of the AIF are marketed.

Key amendments: Liquidity management tools

Article 10-16 of the latest iteration of AIFMD II focuses on liquidity risk management as part of the regulator's focus on financial stability and increasing oversight of the financial system.AIFMD II requires (article 16) that open-ended funds select at least two liquidity management tools from a list of options including:

suspension of redemptions and subscriptions

redemption gates

extension of notice periods

redemption fees

swing pricing or dual pricing

anti-dilution levy

redemptions in kind (also known as “in specie” redemption)

side pockets to separate illiquid assets from remaining liquid investments

“This list is extremely interesting as there will be many in the industry that would question the appropriateness of describing redemption fees and anti-dilution mechanisms as liquidity management tools,” said lawfirm Eversheds Sutherland.According to consultancy Ogier there has always been concerns about investor protection and liquidity risk in open-ended AIFs — in the event a flurry of redemption requests sparks an asset fire sale.“Those liquidity issues may even be exacerbated by the political and market events. Recognising the growing necessity of safeguarding the liquidity of AIFs in times of increased redemption stress, the EU Council has put on the liquidity management tools (LMTs) at the disposal of AIFMs,” Ogilivy said.The EU financial markets regulator and supervisor (ESMA) has been tasked with the development of regulatory technical standards to specify the characteristics of liquidity management tools (article 15).On 8 July 2024, ESMA published drafts of the RTS and Guidelines for consultations for supervisory reporting by 8 October 2024.

New services AIFMs can perform

AIFMD II extends the type of ancillary services an alternative fund management company can provide to include: benchmark administration and credit-servicing, originating loans and servicing securitisation SPVs, as well as portfolio management, according to the draft regulatory technical standards.

Authorisation

Under AIFMD II, the supervisory reporting requirement in respect of delegation and sub-delegation to third parties has been broadened to include information on the identity of the delegate and the role they will perform within the broader financial system.

Organisation

The new substance rules in AIFMD II mean all an AIFM's business must be conducted by at least two EU domiciled people (article 24). According to Eversheds Sutherland, the draft regulatory technical standards don’t specify if this will be applied retrospectively.

Disclosures

Somewhat randomly, the first version of AIFMD didn’t require an alternative fund management company to disclose their names prior to investment, an omission which has been corrected in version two.ESMA has been mandated to develop the draft regulatory technical standards to prevent AIFs from using names that are unfair, unclear or misleading.

“Passporting” for depositaries

AIFMD II includes changes to ‘passporting’ rules, EU jargon for right for depositaries to offer the financial services in multiple countries beyond their home member state.The new rules mean depositories will no longer need to be located in the same member state as the appointing fund.“The amendment made by AIFMD II falls short of providing for a “depository passport”, but it does provide that the NCA of an EU AIF’s home Member State may allow institutions established in another Member State to be appointed as a depositary,” lawfirm Dechert said.

Loan origination funds

AIFMD II sees loan originating funds defined for the first time. According to the Alternative Investment Managers Association (AIMA), under AIFMD I most private debt fund managers simply operated under the general framework.“AIFMD II completes the AIFMD framework by introducing a specific regime for loan originating AIFs. The new regime aims to facilitate EU cross-border activities of loan originating AIFs by creating a harmonised framework,” AIMA said.

Characteristics of loan-originating AIFs

AIFMD II distinguishes between two types of loan Loan-originating AIFs — a loan-originating AIF and an AIF ‘engaging in loan origination’. A loan-originating AIF is a fund manager whose investment strategy is mainly to originate loans, or where the notional value of its AIF’s originated loans is worth more than 50% of its net asset value, according to lawfirm Debevoise & Plimpton.

Requirements applicable to all loan-originating activities

An EU AIFM is required to put in place policies that are proportionate to the extent of the loan origination and review them at least once a year, according to Debevoise & Plimpton. There are several additional requirements, including:

Conflict of interest rules

Concentration limits — loans to a single borrower are capped at 20% of a fund's AUM

Leverage limits (open-ended funds — 175%/closed-ended — 300%)

Retain 5% of the notional value of each loan originated

Sound liquidity risk management systems

Disclosure of portfolio composition

AIF's whose only loan origination activity consists in granting shareholder loans, as long their notional value is less than 150% of the AIFM’s capital are exempted from creating several of the required effective policies.The directive classifies a “shareholder loan” as one in which the AIFM holds more than a 5% stake.

Actions for investment firms

According to Debevoise & Plimpton there will be little practical change for AIFMs as EU AIFMs which are engaged in loan origination to any scale are likely to have these policies in place.Impact on Non-EU EntitiesAlthough AIFMD II will not be directly applicable to funds based in non-EU jurisdictions (non-EU AIFMs, which includes the United Kingdom) — but under the current directive they will be affected in two scenarios.The first is when a non-EU AIFMs markets to, and raises capital from, an EU investor, like a family office, or acts as a delegate or agent of an EU-AIFM.“In these instances, a number of the new provisions on delegation, annual and regulatory reporting and investor disclosures will apply,” lawfirm Mayer Brown said.“As for UK-based funds and the UK version of AIFMD, there is currently no indication that the UK is planning to make similar changes.The UK Financial Conduct Authority has, however, suggested that there will be a consultation on UK AIFMD during 2024 to implement certain simplification measures,” Mayer Brown added.Non EU-AIFMs must also meet the trading bloc’s anti money laundering rules and tax matters.The existing term of non-cooperative jurisdictions is replaced with high-risk third country.AIFM may not have an office in non-cooperative jurisdictions and the country must not be on the EU list of non-cooperative jurisdictions for tax purposes.The country must have also signed an information exchange agreement on tax matters with the home member state of the EU fund manager and the member states in which the distribution takes place in accordance with article 26 of the OECD Model Tax Convention on Income and on Capital.

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Published May 28, 2025.Author:
Aaron Woolner is a financial journalist with over a decade of experience covering banking, insurance, fintech, and regulatory topics. Having led editorial teams at prominent publications like Capital.com and Asia Risk, Aaron delivers informed and compelling insights from across Asia and Europe.Disclaimer
This publication is provided for general information purposes and does not constitute legal, tax, or other professional advice from Narvi Payments Oy Ab or its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional.