The EU’s revised Alternative Investment Fund Managers Directive (AIFMD II) came into effect in April, but industry participants have warned of the compliance challenges it presents.
The AIFMD II regulatory framework introduces new rules around risk retention, liquidity risk management, leverage limits and concentration limits, with the aim of improving transparency and mitigating systemic risk.
However, Zach Milloy, partner in the investment funds and private capital practice of law firm Paul Hastings, said a less visible compliance challenge introduced by the reforms is that managers engaging in loan origination must implement formal processes and procedures for granting loans, assessing credit risk and monitoring credit portfolios. Alongside this, all of these must be reviewed on a regular basis.
This could create additional work for managers where these processes have previously been more informal, he stressed.
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“AIFMD II will significantly impact how firms assess loan assets in fund portfolios by requiring sponsors to implement more robust internal procedures and policies around granting, administering and monitoring loans,” Milloy told Alternative Credit Investor.
“For many sponsors, processes around assessing credit risk and monitoring credit portfolios have historically existed in practice, but have not always been embedded in governance frameworks,” he said. “AIFMD II represents a clear obligation for firms to formalise and evidence those existing practices.”
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Milloy added that this could place disproportionate pressure on smaller managers with leaner legal and compliance teams.
“For these firms, the priority should be mapping what they already do against the new requirements and identifying where the gaps are, particularly around documentation, reporting and governance,” he added.
