The European Securities and Markets Authority’s (ESMA) proposed rule changes for open-ended loan-originating alternative investment funds (AIFs) should help firms manage operational risks, according to Pinsent Masons partner Mark Shaw.
ESMA, the European Union’s financial markets regulator, published a consultation paper last month that sets out additional requirements for open-ended structures in the loan-origination space.
The current regulatory preference under the alternative investment fund managers directive (AIFMD) has been for loan-originating AIFs to be closed-ended unless certain additional requirements are met.
ESMA’s consultation closes on 12 March 2025. It intends to finalise the regulatory technical standards (RTS) in late 2025.
Shaw said the consultation should be seen in the wider context of the credit market. “Debt offered by non-bank providers continues to supply significant growth and opportunity,” he said.
“According to the Private Debt Survey 2024 conducted by KPMG, private debt in Luxembourg alone has soared to an impressive €510bn [£423.5bn]. With the unceasing fundraising in this area, ESMA is now looking to address regulation of a subset of private credit funds – open-ended loan-originating AIFs. The general background of private debt informed the proposed RTS, as ESMA balances financial stability in the post-global financial crisis world on one hand and business access to private credit on the other.”
Read more: Private credit fund managers prepare for stricter EU rules
Shaw added: “Loans generally lend themselves better to closed-ended structures, where the repayments and any associated liquidity issues are not exacerbated by the investors redeeming their investments periodically, due to investors being tied for the duration of the AIF’s term.
“However, this may limit the asset class for certain investors; opening up the market by allowing open-ended loan originating AIFs should permit a wider pool of investors to benefit from the diversification that the asset class offers, whilst the proposed RTS addresses the additional risks associated with open-ended loan-originating AIFs and focuses on proactive risk management in this space.”
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ESMA recognises that loan-originating AIFs should be able to adopt an open-ended structure, if AIF managers can demonstrate appropriate liquidity risk management systems compatible with the investment strategy and redemption policies.
AIF managers are required to periodically conduct stress tests under both normal and exceptional liquidity conditions, at least on a quarterly basis, unless a higher frequency is justified.
The proposed standards are not intended to create a bespoke regime for open-ended loan-originating AIFs, but to impose extra procedural checks where additional risks arise in the context of open-ended loan-originating AIFs.
Read more: New AIFMD poses leverage challenge for private credit funds
