Loan origination funds under AIFMD II: the leverage caps and retention rule
AIFMD II, Directive (EU) 2024/927, and its harmonised regime for loan-originating alternative investment funds, with a transposition deadline of 16 April 2026; and the UK's separate, divergent reform of its own fund-management regime.
AIFMD II gives the EU its first common rulebook for funds that originate loans, and it takes effect on 16 April 2026. For a private credit manager this is a priority read, because it changes lending itself rather than adding a reporting layer. It changes the lending itself: what a fund can originate, how much it can borrow against that book, how concentrated it can be, and whether it can sell down the loans it makes. The leverage caps, retention requirement and concentration limits constrain strategy, not just disclosure. A manager who has built a levered, syndicate-and-sell or concentrated direct-lending model has to work out whether and how they apply.
The first question, for any UK manager since Brexit, is whether the regime reaches the firm at all, and for credit managers the answer is yes more often than they expect, because so many run European vehicles to raise European capital. What follows works through the definition of a loan-originating fund, the four changes that reshape origination, and what a credit manager should do before the deadline. That includes the UK manager who isn’t directly in scope but is supervised by regulators arriving at the same concerns from a different direction.
The UK is not transposing AIFMD II. It’s reforming its own regime separately, through the FCA and HM Treasury’s review, with a draft statutory instrument and an FCA consultation expected in the first half of 2026. It hasn’t proposed a matching harmonised loan-origination regime; it deals with private credit risk through supervision and the joint FCA and Bank of England view instead. So a purely domestic UK credit fund, with no EU vehicle and no EU investors, isn’t directly bound by the AIFMD II loan-origination rules.
That description fits fewer credit managers than it looks, because the asset class is international and the capital is European. Three routes bring AIFMD II into scope for a UK credit manager. The first, and the most common in credit, is an EU loan-originating AIF somewhere in the group: plenty of UK managers run a Luxembourg or Irish vehicle to lend into Europe and to raise from European institutions, and that vehicle sits squarely inside the regime. The second is marketing into the EU under national private placement, where the tightened conditions apply. The third is acting as a delegate to an EU AIFM that runs a loan fund, where the obligations come back to the UK manager through the EU manager’s compliance. Map the structure against these three first: one European lending vehicle brings the loan-origination rules into the group.
Even a UK-only manager should understand the regime, for two reasons. The UK’s own reform and the FCA and Bank of England’s private-credit work are converging on the same concerns AIFMD II answers with hard caps: leverage, concentration, originate-to-distribute risk. The UK manager will meet those questions through supervision, without the same numbers attached. And investor expectation will move toward the AIFMD II model whatever the domicile, because European institutions putting money into a UK fund carry the regime’s assumptions with them.
The regime turns on a definition, and the definition is wide. A loan-originating AIF is one whose investment strategy is mainly to originate loans, or whose originated loans make up at least fifty per cent of its net asset value. That catches the core of the market: direct lending, mid-market and large-cap lending, asset-based lending where the fund originates. It asks a manager to read each vehicle on its facts rather than assume that anything labelled credit is, or isn’t, loan-originating. A fund that buys loans in the secondary market is treated differently from one that makes them. A fund whose originated loans cross the fifty-per-cent line is in scope even where origination isn’t its only activity.
The threshold has a second consequence. A hybrid or opportunistic credit fund can drift into scope as its mix tilts toward origination, so classification isn’t a one-off call made at launch. It’s a position the manager has to watch as the book changes, because it decides whether an entire second rulebook applies.
For a fund in scope, four requirements change the economics and the structure of lending. Model each against the current and target strategy.
The first is leverage. AIFMD II caps a loan-originating AIF’s leverage, on a commitment basis, at 175 per cent of net asset value for an open-ended fund and 300 per cent for a closed-ended one. For a strategy that has used borrowing to lift returns on a book of lower-yielding senior loans, that’s a hard ceiling, and it pulls on the open-ended-versus-closed-ended decision. An open-ended credit vehicle is both more limited on leverage and, under the liquidity rules, presumed closed-ended unless it can show its liquidity management is compatible with redemptions. The open-ended cap and closed-ended presumption force a structural choice between high leverage and open-ended dealing. Transitional grandfathering covers funds and loans that predate the regime, but new activity is caught, which means the caps shape every fund raised or restructured from here.
What counts toward the cap matters as much as the number. The commitment-method calculation picks up the fund’s borrowing, and a credit fund’s leverage often comes not only from term debt but from the subscription lines and NAV facilities that are now a routine part of the toolkit. A manager who has treated a NAV facility as a liquidity convenience rather than as leverage may find it eats headroom under the cap. Run the calculation on the fund’s actual financing stack, not on term borrowing alone. The cap also exempts certain borrowing arrangements in defined circumstances, so the precise computation, and what falls in or out of it, is a technical job worth doing carefully rather than estimating; a few percentage points can determine whether the structure complies.
The second is retention, paired with a ban on originate-to-distribute. AIFMD II stops a manager running a loan-originating fund to originate loans for the sole purpose of selling them on, and it requires the fund to keep at least five per cent of the notional value of each loan it originates and then transfers, held for a set period. That reworks any strategy built on making loans and selling them down, whether by syndication, sales to other funds, or feeding a securitisation. The fund has to retain risk in each loan, which changes the economics of a sell-down model and requires systems to track and hold the retained piece. A manager whose model depends on moving originated loans out quickly should re-examine it against this rule before the others.
The third is single-borrower concentration. The regime limits a loan-originating fund’s exposure to one borrower, broadly to twenty per cent of the fund’s capital where that borrower is a financial undertaking, another AIF or a UCITS. It imposes a diversification discipline that constrains concentrated lending and requires the manager to monitor exposures against the limit. This is also where the rule meets the financial-stability worry about concentration that the Bank of England has flagged.
The fourth closes off connected-party lending. A loan-originating fund may not lend to its own manager, the manager’s staff, its depositary, or its delegates. That rules out related-party lending and reaches directly into cross-fund and affiliate arrangements, which a multi-vehicle credit platform has to check with care, and which connect to the wider conflicts and cross-fund-lending discipline covered elsewhere in this series.
Around these four sit further obligations a loan-originating fund has to meet: policies, procedures and processes for granting credit, assessing credit risk and administering the loan portfolio, applied across the life of the loans; the closed-ended presumption, and the need to demonstrate liquidity compatibility if the fund is to be open-ended; and fuller disclosure to investors about the loan portfolio and the fund’s costs. Together they add defined, evidenced process requirements to loan origination.
Exhibit: the four rules and their effect on origination strategy
| Rule | Effect on strategy | Action |
|---|---|---|
| Leverage caps, 175% open-ended / 300% closed-ended, commitment basis | Limits levered strategies; forces the open-versus-closed-ended choice; reshapes return models | Model leverage against the caps and choose the structure deliberately |
| Retention and originate-to-distribute ban, retain 5% of originated-and-transferred loans, no origination solely to sell | Reshapes syndication, sell-down and securitisation-feeder models | Build retention tracking and re-examine any distribution-led strategy |
| Single-borrower concentration, broadly 20% of capital for financial-undertaking and fund borrowers | Constrains concentrated lending | Monitor exposures against the limit and diversify where needed |
| Connected-party lending ban, no lending to the manager, staff, depositary or delegates | Closes related-party and some cross-fund lending | Review affiliate and cross-fund arrangements against the ban |
The work splits into scoping, modelling and building, and all three should run before April 2026.
Scope first. Work out, vehicle by vehicle, which funds are loan-originating AIFs under the definition, and which of the three doors (an EU vehicle, EU marketing, delegation) bring the regime into the firm. That analysis tells the manager which constraints apply where.
Then model the constraints against strategy. For each in-scope fund, run the leverage caps against current and intended leverage, the concentration limit against the actual book, and the retention rule against any sell-down or syndication. The aim is to find, ahead of the deadline, where the current or planned strategy collides with a hard limit, because the fix, whether that’s restructuring a vehicle, changing its open-ended status, or adjusting leverage or distribution, takes time.
Then build the capabilities. The fund needs systems to track and hold the five-per-cent retention, to monitor single-borrower concentration against the limit, and to evidence its credit-granting and portfolio-administration processes. If it’s to be open-ended, it needs to demonstrate liquidity compatibility. It needs the investor disclosure the regime requires. And it needs to confirm that no in-scope fund lends to connected parties.
Last, don’t treat a UK-only fund as exempt from the underlying concerns. The UK has no matching harmonised loan-origination regime today, and the onshored FUND sourcebook carries no loan-origination-specific provisions; the matter is deferred to the 2026 AIFMD review, and the leverage and notice-period questions for alternative funds are expressly held over to it. What the UK regime does already require is leverage governance. Under FUND 3.7.7 and 3.7.8R a manager must set a reasonable maximum level of leverage for each fund and comply with it at all times, and the reporting hooks at FUND 3.4 capture substantially leveraged funds — commitment-method exposure above three times NAV, at FUND 3.4.6. The FCA and the Bank of England are looking at leverage, concentration and origination risk in UK private credit directly, and the UK reform will set its own expectations in 2026. A manager who builds the AIFMD II disciplines for its EU vehicles will find much of the same evidence useful when its UK supervisors ask, and a manager running UK-only should still be able to show it has thought about the risks the EU has chosen to cap.
The divergence creates a structuring decision the credit board should take deliberately. Because the UK hasn’t adopted the loan-origination caps and the EU has, the same strategy can face very different structural limits depending on where the originating vehicle sits and which investors it serves. A manager raising mainly from European institutions will find an EU vehicle, and its caps, unavoidable. A manager serving UK and non-EU capital has more room on leverage and concentration, but should weigh that against the FCA and Bank of England’s supervisory direction and against the expectations European LPs bring whatever the domicile. Where the fund originates now determines which leverage, retention and concentration regime applies; the board should document that trade-off.
This insight is provided for general informational purposes only and doesn’t constitute legal, investment, or regulatory advice.