Update From Our Partner Firm Elvinger US: AIFMD II - Key Changes And Implications For AIFMs

With exactly 6 months to go until the AIFMD II transposition deadline (i.e., 16 April 2026), the countdown is on. Without aiming to provide an exhaustive summary, here are 10 key takeaways you should have on your radar regarding the upcoming changes grouped in two categories: five changes directly impacting products set up by US Sponsors (*) and five updates having an indirect impact only (-).

1. Loan Origination European Passport and Framework (*)

AIFMD II ensures that alternative investment funds (AIFs)/alternative investment fund managers (AIFMs) may engage in loan origination at EU level (which was previously determined at Member State level) (the so-called "loan origination passport") and introduces a comprehensive regime for funds which originate (any) loans (directly or indirectly) (FoLs) and additional requirements for "loan-originating" AIFs (LoFs – i.e., AIFs whose main investment strategy is to originate loans/of which loans constitute more than 50 percent of the notional value). In general, the most important new requirements for FoLs include:

• A 5% risk retention requirement: save for certain exceptions, AIFs must retain 5% of the notional value of each loan originated and then transferred.
• A 20% concentration limit where the borrower is a financial undertaking, an AIF, or an undertaking for collective investment in transferable securities (UCITS).
• Restrictions on lending to related parties: prohibition to lend to the AIFM (or the staff of the AIFM), the FoLs' depositary (and its delegates), any entity to which the AIFM has delegated functions (and the staff of that entity), or AIFM group entities (with certain exceptions).
• Prohibition of originate-to-distribute strategies.

LoFs are generally required to be closed-ended unless the AIFM can demonstrate to its national competent authorities (NCAs) that it has sufficient liquidity management capacity. Leverage will be capped at 175% for open-ended LoFs and 300% for closed-ended LoFs (excluding fully covered borrowing).

2. Liquidity Management Tools (LMTs) (*)

To enhance liquidity risk management, open-ended AIFs are now required to select at least two LMTs from a list in Annex V of the directive (excluding money market funds, which need only one). The list is quite broad and includes suspension of subscriptions/redemptions, gates, redemption fees, side pockets, etc. AIFMs must implement detailed policies for activating and deactivating LMTs and disclose the operational conditions under which they may be used. Notifications to NCAs are required upon activation or deactivation, with ESMA also being notified in certain cases.

3. Enhanced Pre-Contractual Disclosures (article 23 AIFMD) (*)

AIFMD II clarifies and (slightly) expands the disclosures which should be made to investors prior to them entering your fund. Notably, it will now become mandatory to disclose a comprehensive list of all fees, charges, and expenses borne by the AIFM in connection with the operation of the AIF that are directly or indirectly allocated to the AIF (i.e., simply providing the AIFM's maximum annual fees will not be enough anymore).

The periodic disclosure obligations are also amended to explicitly include that the AIFM shall disclose on an annual basis all fees, charges and expenses borne by investors during that year, as well as SPVs, etc. used in relation to the AIF's investments.

4. Impact on Non-EU AIFMs (*)

Non-EU AIFMs marketing AIFs within the EU under Article 42 AIFMD (NPPR) also face certain new compliance requirements:

• Non-EU AIFMs cannot be based in countries listed as high-risk under EU AML regulations or as non-cooperative in tax matters (neither Delaware nor the Cayman Islands are currently included on these lists).
• Additional disclosure and reporting obligations which align more with those of EU AIFMs.

5. Employee Investment Schemes (*)

AIFMD II now provides a first (explicit) provision for employee investment schemes. AIFMD II mandates Member States to ensure that an authorized EU AIFM is able to market units or shares of an EU AIF which invests predominantly in the shares of a particular company, to employees of that company or of its affiliated entities. These investment set-ups have been fairly popular, as they foster alignment of interests between staff and company performance, but have been met with uncertainty about their distribution set-up. AIFMD II now provides the first steps to a framework in this regard.

6. AIFM Authorization and Substance Requirements (-)

Authorization under AIFMD II now includes a strengthened focus on management substance. AIFMs must employ at least two full-time conducting officers domiciled in the EU. They must also provide detailed descriptions of both human and technical resources dedicated to portfolio and risk management, as well as oversight of delegated functions. Additionally, although not binding, it is recommended that AIFMs managing AIFs marketed to retail investors include at least one independent or non-executive director.

7. Delegation Oversight (-)

AIFMD II introduces more granular qualitative and quantitative disclosure requirements around delegation (and thus on any Delaware/Cayman portfolio manager appointed by the AIFM). When portfolio management is delegated, AIFMs must, for example, now disclose the proportion and value of the AIF's assets under such arrangements. A list and description of the activities concerning portfolio management and risk management functions which are delegated must also be provided.

8. Conflict of Interest Management (-)

Regulators will apply greater scrutiny to how AIFMs handle conflicts of interest. AIFMs must demonstrate robust mechanisms for preventing, identifying, monitoring, and, where appropriate, disclosing conflicts. These requirements are particularly important for third-party AIFMs.

9. Expanded Reporting Obligations to Regulators (-)

The new regime significantly broadens the scope of reporting. Under AIFMD I, AIFMs only had to report on the AIF's main instruments, principal exposures and most important concentration of each AIF managed. AIFMD II now requires reporting on all instruments, exposures, and assets held by each AIF. Moreover, AIFMs must disclose to the regulator the total amount of leverage actually employed by the AIF.

10. Depositary Flexibility (-)

While AIFMD II does not introduce an EU-wide depositary passport, it now allows for the use of a depositary based in a different Member State than the AIF, on a case-by-case basis, provided the AIFM can justify the absence of suitable domestic options. Luxembourg which has a very well-established service provider/depositary market is unlikely to be impacted, except for the fact that funds located elsewhere could seek to appoint a Luxembourg provider.

Conclusion

AIFMD II represents a critical shift towards greater transparency, oversight, and harmonization across Europe's alternative investment industry, particularly when it comes to loan-origination for AIFs. While compliance will require thoughtful preparation, these reforms also create an opportunity for AIFMs to strengthen governance, enhance investor trust, and future-proof their operational frameworks. Need assistance navigating these upcoming changes and what this means for your business:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.