The concentration limit for loans to financial undertakings, AIFs and UCITS uses its own base, and it is neither NAV nor gross assets.
The AIFMD II limit is 20 per cent of the fund's capital, and capital means commitments, called and uncalled, after deducting the fees, charges and expenses investors bear, not NAV and not gross assets. On an illustrative 600 million closed-ended credit fund with 66 million of lifetime fees and expenses, capital is 534 million and the most it can lend to a single financial undertaking, AIF or UCITS is 106.8 million, not the 120 million a reading on commitments gives.
Worked in full in The AIFMD II Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Directive (EU) 2024/927 adds a concentration limit to the loan origination rules. An AIF may not lend more than 20 per cent of its capital, in aggregate, to a single borrower that is a financial undertaking, an AIF or a UCITS. Loans to ordinary companies are outside this limit, whatever the fund's own diversification rules say. The point of the rule is interconnectedness: a credit fund that finances other funds or lenders should not become one of them by stealth. The arithmetic is simple. The base is where funds get it wrong.
| Input | Value |
|---|---|
| Commitments | 600.0 |
| Management fees over the life, 1.0% of commitments for 8 years | 48.0 |
| Organisational and operating expenses borne by the fund over the life | 18.0 |
| Fees, charges and expenses borne by investors | 66.0 (11.0%) |
Capital = capital contributions + uncalled committed capital − fees, charges and expenses borne by investors
= 600.0 − 66.0 = 534.0
Single-borrower limit = 20% × capital = 106.8
Headroom on a borrower = 106.8 − all loans outstanding to that borrower
In Excel, with commitments in B1 and estimated lifetime fees and expenses in B2: =0.2*(B1-B2). The directive's definition of capital is amounts investable after fees, so the fee estimate needs a documented method: the fund's own fee terms applied over its expected life, revised when they change.
| Borrower | Loan | In scope | Headroom |
|---|---|---|---|
| NAV facility to another private equity fund (an AIF) | 90.0 | Yes | 16.8 |
| Loan to a specialty finance company (financial undertaking) | 120.0 | Yes | −13.2 |
| Loan to a manufacturing company | 120.0 | No | Not subject to the limit |
The NAV facility fits, with 16.8 million to spare for any further lending to the same fund. The specialty finance loan breaches by 13.2 million: the fund can hold at most 106.8 million of it and must syndicate the rest or not lend. The loan to the manufacturer is the same size and raises no AIFMD II concentration issue at all, because the borrower is neither a financial undertaking, nor an AIF, nor a UCITS. The test is on the borrower's nature first and the amount second.
Aggregate every loan to the same borrower: a term loan and a revolving facility to one specialty lender count together, drawn and undrawn as the fund's methodology defines exposure. Group the borrowers you treat as one in the credit file the same way in the limit monitoring, and record why.
The directive lets the limit start from the date the fund's rules or instruments of incorporation set, which may be no later than 24 months after the first subscription. It stops applying once the fund starts selling assets to redeem units as part of its liquidation, and it is suspended for as long as strictly necessary, and no longer than 12 months, when the fund's capital is increased or reduced. Member States apply the loan origination rules from 16 April 2026. Loan-originating AIFs constituted before 15 April 2024 are deemed to comply until 16 April 2029, provided they do not increase a single-borrower exposure already above the limit, or push one that is below it over the limit; those that raise no additional capital after 15 April 2024 are deemed to comply outright. Check which regime a given fund falls under before assuming the limit binds today. None of this changes the base: whenever the limit applies, it is 20 per cent of capital.
| Base used | Base | 20% of it | Verdict on the 120.0 loan |
|---|---|---|---|
| Commitments, ignoring fees | 600.0 | 120.0 | Passes, wrongly |
| Called capital at month 12 | 210.0 | 42.0 | Fails, too strictly |
| Gross assets, NAV 520.0 at 150% leverage | 780.0 | 156.0 | Passes, wrongly |
| Capital, as defined | 534.0 | 106.8 | Fails |
| Commitments | Fees 5% | Fees 11% | Fees 15% |
|---|---|---|---|
| 200 | 38.0 | 35.6 | 34.0 |
| 400 | 76.0 | 71.2 | 68.0 |
| 600 | 114.0 | 106.8 | 102.0 |
| 1,000 | 190.0 | 178.0 | 170.0 |
Each point of lifetime fee drag costs a 600 million fund 1.2 million of single-borrower capacity. That is small next to the error of using the wrong base, but it is exactly the margin by which a large fund finance ticket passes or fails, and the fee estimate behind it is the first thing a supervisor will ask to see.
Borrowing the base from another test. The 50 per cent loan origination test is on NAV and the leverage caps divide exposure by NAV, so teams reach for NAV or gross assets again. The concentration limit uses neither. Measured on gross assets, this fund would believe it could lend 156.0 million to the specialty finance company; on commitments, 120.0. Both are wrong, both in the direction of more risk, and the gap to the correct 106.8 million grows with leverage and with fees.
The single-borrower limit is 20 per cent of commitments net of the fees and expenses investors bear: 106.8 million on 600 million here. Apply it only to borrowers that are financial undertakings, AIFs or UCITS, aggregate every loan to each of them, and document the fee estimate. Whether a fund is loan-originating at all is worked in the 50 per cent test, and the free workbook for this case includes a fund scoping table that computes the tests side by side for your own funds.
No. It applies only where the borrower is a financial undertaking, an AIF or a UCITS. In the illustrative fund, a 120.0 million loan to a specialty finance company breaches the 106.8 million limit by 13.2 million, while a 120.0 million loan to a manufacturing company is not subject to it.
Aggregate capital contributions and uncalled committed capital, on the basis of amounts investable after deducting all fees, charges and expenses borne by investors. For a 600 million fund expecting 66 million of lifetime fees and expenses, 11.0 per cent, capital is 534 million and the limit 106.8 million.
From the date set in the fund's rules or instruments of incorporation, no later than 24 months after the first subscription. Measuring it early on called capital is too strict: 20 per cent of 210.0 million called at month 12 is 42.0 million, far below the 106.8 million the fund is allowed once the limit applies.
This article is one calculation from The AIFMD II Handbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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