Martin Mager, investment funds partner at Linklaters in Luxembourg. He spoke with Delano about the EU’s AIFMD and Eltif reforms during Q4 2022. Photo: Linklaters

Martin Mager, investment funds partner at Linklaters in Luxembourg. He spoke with Delano about the EU’s AIFMD and Eltif reforms during Q4 2022. Photo: Linklaters

Luxembourg has historically maintained a liberal regulatory regime for private debt. Its challenge now is navigating key regulations such as the Alternative Investment Fund Managers Directive and the European Long-Term Investment Fund.

With over a third of Europe’s private debt funds domiciled in Luxembourg and the asset class among the fastest growing of alternative assets, the financial centre and its actors are keen to lay the foundations for further growth.

Regulations such as the AIFMD and the Eltif will be crucial in the cross-border functioning of Europe’s private debt market as a whole, says partner at international law firm Linklaters, , so it’s no surprise that Luxembourg has been particularly vocal in ensuring that regulations nurture the asset class.

“Luxembourg is the place to be for alternative funds. And, as a result, the AIFMD and the Eltif reviews show a lot of input from Luxembourg,” said Mager.

AIFMD

Of main concern for private debt has been the AIFMD. The alternative investment regulation is designed to protect investors in alternative funds by providing a supervisory framework for the fund manager. However, a recent review by the European Commission proposed aspects that may be damaging to private debt.

“The AIFMD had sought to put in place restrictions on loan origination for alternative investment funds. This would have particularly affected private debt, which originates loans for a diversified range of businesses,” said Mager.

The amendments would have prohibited open-ended funds from originating more than 60% of their assets. In the case where origination breached that percentage, the funds would have had to become closed-ended.

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The Luxembourg investment fund body Alfi and the financial regulator recommended instead that the AIFMD’s “closed-ended” rule were replaced with appropriate liquidity measurements. They also recommended that liquidity measurements replace an AIFMD proposal to hold 5% of the value of any loan they sell as a risk retention requirement.

The European Parliament this year upheld these recommendations. A positive thing for private debt, said Mager, although it still needs to be voted for by the European Council.

Eltif

What will be really interesting is how the AIFMD interacts with the Eltif. “What the industry tried to push for is whether the requirements under the AIFMD would actually be applicable with respect to the Eltif, or if the Eltif product overrides this,” said Mager.

The Eltif is a fund dedicated to long-term, alternative investments that can be distributed on a cross-border basis to both professional and retail investors.

As with the AIFMD, Luxembourg worked hard on making sure the Eltif was suitable for every variety of alternative investment. This included lobbying through working groups set up within Alfi and working closely with the financial regulator to provide stronger guidelines on the framework and structuring of Eltifs. 

However, unlike with the AIFMD, the Eltif did not contain any stipulations about loan origination that would have particularly harmed private debt.

“The Eltif is a good regime to set up but not so addressed at loan-originating funds,” said Mager.

Instead, the framework’s problem was more an issue of a general lack of clarity. This has now been resolved by the European Council’s October approval of the “Eltif 2.0”.

“In general, it’s going in the right direction,” said Mager. 

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