AIFMD II and loan-originating funds in Luxembourg

Since 16 April 2026, loan origination, meaning the granting of new loans, is subject to specific credit, concentration and loan-disposal rules within the full alternative investment fund manager (AIFM) regime. Additional requirements apply when an alternative investment fund (AIF) qualifies as a loan-originating AIF. These include limits on leverage, which increases investment exposure through borrowing or other arrangements. Liquidity requirements, which concern access to cash when needed, also apply to those funds. Making one loan does not necessarily put the whole fund in that category.

Luxembourg transposed AIFMD II, the reform of the EU Alternative Investment Fund Managers Directive, through the Law of 3 March 2026. The main requirements apply from 16 April 2026. A new Luxembourg fund with a lending strategy should therefore address them before the first investment is approved.

The scope of the loan rules

The framework separates loan origination from the simple purchase of a loan. The AIFMD II definitions cover a loan granted directly by an AIF. They also cover certain indirect arrangements. A third party may grant the loan for the AIF, including through a special-purpose vehicle set up for a particular investment or transaction. The arrangement is covered when the AIFM or AIF helps structure the loan or agrees its terms before taking on the exposure.

A loan-originating AIF is a fund whose strategy is mainly to originate loans. A separate numerical test uses the fund’s net asset value, the value of its assets after deducting liabilities. The fund also qualifies when the notional value of its originated loans, their face amount, is at least 50% of that net asset value. The strategy test can apply before the numerical threshold is reached.

The credit, retention and conflict rules cover loan-origination activity more broadly. The specific leverage caps and the rule that a fund must normally be closed-ended concern funds meeting the definition of a loan-originating AIF. The provisions discussed here form part of the full AIFM operating regime. A manager using the Article 3 registration exemption does not acquire that full regime merely because its fund lends, although other lending and product rules remain relevant.

The legal form or fund regime does not decide the result. An SCSp, or special limited partnership, or a RAIF, or reserved alternative investment fund, can fall within the rules when its activity meets the definition.

Credit governance

An AIFM managing a fund that originates loans must maintain effective policies and processes for granting credit. Those controls must also cover credit-risk assessment, administration and monitoring, with review at least annually. The specific lending-process requirement has an exception for shareholder loans whose aggregate notional value does not exceed 150% of fund capital. General duties of care and risk management remain.

The policy should match the actual investment process. It normally identifies who may approve a loan, how the borrower is assessed, how conflicts are handled and how collateral, the security backing a loan, is monitored. Monitoring also covers covenants, the contractual conditions that the borrower must meet, as well as amendments and recovery. The same information must reach valuation, risk management and investor reporting.

An adviser may source and analyse a transaction, but delegation does not remove the AIFM’s responsibility for the portfolio and its oversight.

Concentration and leverage limits

The dedicated borrower limit is narrower than a general portfolio concentration rule. The aggregate notional value of loans originated to one borrower may not exceed 20% of fund capital when that borrower is a financial undertaking within the referenced Solvency II definition, another AIF or a UCITS, a fund covered by the separate EU regime for transferable securities.

For this test, capital includes money or assets contributed and uncalled commitments, which investors have promised but have not yet been asked to pay. The measure is the amount available for investment after deducting the relevant charges borne by investors. It is distinct from the net asset value used for the leverage ratio.

The fund documents set the date for meeting the 20% limit, no later than 24 months after the first subscription. Luxembourg’s financial supervisor, the CSSF, may extend that period by up to 12 months in exceptional circumstances. The law also provides limited relief during capital changes and liquidation.

Loan-originating AIFs also have specific leverage limits.

Here leverage is measured as exposure under the regulatory commitment method divided by net asset value. Borrowing that is fully covered by investors’ contractual capital commitments is excluded from this calculation. The percentage caps do not apply where lending consists solely of shareholder loans and their aggregate notional value does not exceed 150% of fund capital, without removing the CSSF’s separate powers.

For these exceptions, a shareholder loan requires at least 5% direct or indirect ownership of the borrower’s capital or voting rights. The loan must also be unable to be sold to third parties separately from the fund’s equity instruments in that borrower.

These limits affect the fund structure, subscription facilities backed by investor commitments and borrowing used to finance individual assets. Monitoring only the vehicle that signs the loan may miss exposure elsewhere in the structure.

Liquidity and fund structure

A loan-originating AIF must normally be closed-ended, with no investor right to request redemption before it winds up. An open-ended fund allows such requests. That structure is possible only when the AIFM can demonstrate to the CSSF that the fund’s system for managing liquidity risk fits the fund’s investment strategy and redemption policy.

This test compares how readily assets can generate cash with when investors may ask to withdraw their money. Loan maturities, expected repayments, the availability of buyers for existing loans, redemption frequency and notice periods must work together. A statement in the prospectus cannot replace a workable cash-flow model.

The draft technical standards published in October 2025 by the European Securities and Markets Authority (ESMA) are a separate set of rules. ESMA stated that Commission adoption would not take place before 1 October 2027 at the earliest. That timetable does not postpone the statutory closed-ended default and the demonstration required for an open-ended structure.

Open-ended AIFs under authorised management also fall within the harmonised liquidity-management framework. The CSSF communication of 18 March 2026 explains the Luxembourg selection, policy and notification process that took effect on 16 April 2026.

Loan transfers and retention

No part of the fund’s investment strategy may consist of originating loans for the sole purpose of transferring those loans or exposures to third parties. The rule prevents a private debt fund from operating only as a temporary holder before passing loans to others.

When an originated loan is sold, the AIF generally retains 5% of its notional value. For a loan with a maturity of up to 8 years, and for a consumer loan, retention normally lasts until maturity. For a longer non-consumer loan, it normally lasts for at least 8 years. The directive contains limited exceptions, including specified disposals required by the fund’s interests or regulatory constraints.

The sale records should therefore document the original credit assessment, the reason for sale and the exposure kept by the fund. If the fund does not retain the required amount for the full required period, the records should identify the exception relied upon.

Restricted borrowers and conflicts

Loans to the AIFM, its staff, the depositary, the depositary’s delegates, and the AIFM’s delegates or their staff are prohibited. The prohibition also covers entities in the AIFM’s group, with an exception for a financial undertaking that exclusively finances borrowers outside the other prohibited categories.

Luxembourg also restricts consumer lending. Article 4-1 prohibits lending in Luxembourg to consumers under the consumer-credit contracts governed by Book II, Title II, Chapter 4 of the Consumer Code, and prohibits credit servicing for those consumers. The EU retention rule for consumer loans therefore does not itself authorise that activity in Luxembourg.

Loan administration fees and expenses must also be disclosed, and the net proceeds of the loan belong to the fund. The economic result shown in the accounts must remain consistent with the lending terms and the disclosures made to investors.

The transition for existing funds

The transition depends on when the fund and the loan existed. AIFs constituted before 15 April 2024 receive temporary treatment for specified concentration, leverage and structural requirements until 16 April 2029. An exposure or leverage level already above the relevant limit cannot be increased. A level below the limit cannot be raised above it during that period.

Funds constituted before 15 April 2024 that raise no additional capital after that date are treated as complying with those specified concentration, leverage and structural provisions without the 2029 end date. The directive’s transition article also distinguishes loans originated before that date from new lending.

The transition is therefore not a general exemption for an existing platform. New capital, new loans and changes to the strategy must each be tested against the relevant rule.