The European Securities and Markets Authority (ESMA) has published an opinion on an EU framework for loan origination by alternative investment funds (AIFs).  This is a measure under the Capital Markets Union (CMU) intended to "…facilitate cross-border development whilst ensuring the funds are regulated appropriately from an investor protection and financial stability perspective."

Points to note:

  • Loan origination by AIFs (i.e. the AIF would be acting as sole or primary lender to primarily SME borrowers) is already permitted by most Member States, but practices differ. For example, Germany, Ireland, Spain, Italy and Malta have bespoke frameworks for loan origination by funds (and France recently consulted on proposals).
  • Loan origination is permitted to a limited extent for European Long Term Investment Funds (ELTIFs) and EU Venture Capital Funds (EuVECAs) and EU Social Entrepreneurship Funds (EuSEFs).  Therefore, this opinion covers AIFs other than ELTIFs, EuSEFs and EuVECAs. 
  • Other forms of credit, such as secondary markets loan participation and restructurings of existing debt are not covered in the opinion.
  • Loans should be mainly originated to SME debtors and individuals, financial institutions, collective investment schemes, AIF managers (AIFMs), depositary, general partner or delegates should not be permitted debtors.
  • ESMA proposes potentially restrictive requirements on loan originating AIFs and their AIFMs including:
    • limits and restrictions on leverage and use of derivatives; 
    • authorisation requirements or, alternatively, a more flexible opt-in framework.
  • ESMA also proposes specific organisational requirements for AIFMs that manage loan-originating AIFs which are intended to mitigate liquidity risks and risks related to imprudent lending.