Under the RR-Rules, the transferring AIF is, in certain circumstances, required to retain 5% of the notional value of the loan that is transferred. The RR-Rules may pose challenges for credit funds considering the full transfer of originated loans as part of their investment strategy.

One of the exceptions that can switch off the application of the RR-Rules is when the transfer of the loan is necessary to implement the AIF’s investment strategy in the best interest of the investors. To qualify for that derogation the EU AIFM is, based on AIFMD 2.0’s wording, not required to demonstrate that the transfer of the 5% portion was necessary to implement the investment strategy; but rather that the transfer of the loan was necessary to implement the strategy in the best interests of the investors.

The investment strategy of a fund essentially defines the type of assets the fund aims to invest in and in a general sense its risk-return ambitions. In line with the very nature of a fund structure, the EU AIFM or its delegated portfolio manager (as applicable) has discretion to determine what is necessary to implement the investment strategy. Investment discretion is also a core feature of the AIF’s definition.

As such, the view can be taken that the necessity of a loan transfer is a flexible and rather open norm. On the other hand, the recitals to AIFMD 2.0 may be interpreted as suggesting a more restrictive approach, in the sense that a transfer would only be deemed necessary if it is implemented to avoid a breach to the investment policy or the regulatory requirements, including product requirements, imposed on the AIF or the EU AIFM.  

In the absence of any meaningful guidance on the concept of “necessity,” we do not see a clear basis for adopting a restrictive interpretation on the concept. Such a restrictive approach is not expressly reflected in AIFMD 2.0 and could, in certain circumstances, run counter to investors’ interests.

Upon request of the regulator the EU AIFM is required to demonstrate that it meets derogation’s condition. It may then be helpful to enshrine the drivers for a transfer of originated loans in the fund’s investment policy as it may ease the discussions with regulators when they scrutinise whether the transfer was necessary to implement the investment policy.

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