Private debt funds in Europe are set to take off
In the first half of 2022, global markets have seen increased market volatility, inflation and the inevitable rise of interest rates. These market conditions have led investment managers to seek fixed returns and lenders to look for alternative finance at competitive rates.
Through legislative change, the European Commission (EC) and the Central Bank of Ireland (CBI) have already put the wheels in motion for a framework to create alternative sources of finance.
Building the Capital Markets Union and the introduction of AIFMD II
At the Waystone European Funds Spotlight, our guest speaker, European Commissioner Mairead McGuinness, discussed the need for a deeper, more integrated Capital Markets Union (CMU). A review of the Alternative Investment Fund Managers Directive (now commonly known as (AIFMD II)) was identified as one of the main pillars for the CMU to succeed. In particular, the EC want to harmonise rules for managers of loan-originating funds across the EU. The goal is to support alternative sources of financing for the real economy while fostering financial stability. The market for direct lending outside the banking sector in Europe is growing, but funds currently operate under a set of divergent national rules. The EC plan to address this fragmentation to help create a single market for loan-originating funds in the European Union.
The Governor for the CBI, Gabriel Makhlouf, echoed these comments at the Irish Funds Conference in May. Mr Makhlouf noted, “Firms with fewer outside financing options – SMEs in particular – are more likely to be faced with higher mark-ups on loans by banks who may also be less inclined to pass on interest rate reductions to them. Increased access to finance (bank or non-bank) – one of the goals of CMU – could make pass-through of monetary policy more complete.”
The Governor spoke specifically about AIFMD II, highlighting that “The AIFMD review also represents a targeted approach to reform. The new loan origination framework will create a common framework throughout Europe for lending activities by investment funds. In an area which has not so far been subject to regulation (except on a limited national basis), this is welcome.”
The CBI and its procedure for launching a private debt fund
I recently participated in a webinar, Regulator Insights: Private Funds in Ireland – Present and future (playback available on the link), with James O’Sullivan (Head of Funds Authorisation at the CBI). I had stated that I had found the current CBI Loan Origination Rules (L-QIAIF Rules) and the changes proposed in AIFMD II to be alike. Specifically, such similarities include the requirement to maintain effective policies, procedures and processes for granting loans and the need to have diversification on exposure to a certain borrower subject to a ramp up and ramp down period already in place. Mr O’Sullivan noted that it was no surprise that the framework is similar. He pointed out that the CBI and the Department of Finance lobbied European Securities and Markets Authority extensively before the AIFMD review commenced to build important features into the European framework. The CBI is in a position to do so as one of the first national regulators to introduce legislation for private credit funds.
The CBI has further enhanced Ireland as a domicile for private debt funds by streamlining the application process by removing the requirement to make a pre-submission for an L-QIAIF, ensuring that managers can avail of the 24-hour approval process.
Waystone is a leading provider of Private Debt Funds in Europe
As the EC continues to grow the CMU with the introduction of AIFMD II, managers can look at Ireland as a domicile ahead of the curve, having already introduced the L-QIAIF regime. Furthermore, the similarities between the L-QIAIF Regime and AIFMD II can give managers confidence that any credit funds established in Ireland will have little legislative disruption once AIFMD II is enacted.
Waystone had identified the L-QIAIF – as the niche in the market for managers some time ago and enhanced its credit risk analytics and investment oversight capabilities by increasing the headcount in its Investment Management Oversight team and hiring credit specialists. Waystone offers a wide range of global solutions for debt structures.
Waystone has the expertise, experience and skill set to launch a loan fund successfully. If you are considering launching a loan origination fund in Ireland or Luxembourg, please get in touch with your usual Waystone representative or contact us below.