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New AIFMD poses leverage challenge for private credit funds

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New EU rules pose leverage issue for private credit funds

Private credit fund managers are adapting open-ended structures to avoid the leverage limits placed on them by the revised Alternative Investment Fund Manag­ers Directive (AIFMD).

The revised EU leg­islation incorporates rules for loan origination funds for the first time, meaning that private credit fund managers will need to comply with stricter requirements.

Under the new rules, the leverage of closed-end­ed loan-originating alternative investment funds will be capped at 300 per cent of their net asset value, while open-ended ones will be capped at 175 per cent.

Legal experts have told Alternative Credit Investor that fund managers are already adapting their open-ended funds to avoid the leverage limit.

Read more: Revised AIFMD could harmonise European lending

Private credit fund managers often aim for 200 per cent leverage, so the 175 per cent limit means they could become uncompetitive in the mar­ket as they will be offering lower returns to investors.

Fund managers are currently in talks with lawyers about the ‘grey area’ of what constitutes an open-ended fund.

Some firms are switch­ing to a run-off model rather than offering redemptions so that they do not count as open-end­ed, the experts said.

And some firms are buying up CLOs and leveraging them so that they are not technical­ly counted as a loan origination fund.

The European Parlia­ment voted to update the AIFMD on 7 February and the text of the Di­rective was then adopted by the European Council later that month, before being published in the EU’s official journal. Member states have two years to adopt the rules in national laws and funds then have a further year to meet the additional data reporting requirements.

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