The 50 per cent limb of the AIFMD II definition, computed on a levered credit fund, and the three ordinary events that carry it across the line.
Under AIFMD II a fund is a loan-originating AIF if its strategy is mainly to originate loans, or if the notional value of the loans it has originated is at least 50 per cent of its net asset value. The test is against NAV, not gross assets, so leverage moves a fund towards it: a credit fund with a third of its assets in originated loans, levered at 140 per cent, is already at 46.7 per cent. A loss of 20.0 elsewhere in the portfolio, 6.7 per cent of NAV, carries it over.
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 attaches the heaviest loan origination rules to the loan-originating AIF: the leverage caps of 175 per cent for an open-ended fund and 300 per cent for a closed-ended one, and a closed-ended structure unless the manager can show its supervisor that liquidity risk management is compatible with the strategy and the redemption policy. Some rules, such as the 5 per cent retention on originated loans that are transferred and the 20 per cent limit on lending to a single financial undertaking, AIF or UCITS, apply to any AIF that originates loans. Whether a fund sits above or below the 50 per cent line therefore decides its permitted leverage and, for an open-ended fund, its structure. It is worth computing rather than estimating.
| Line | Notional | Carrying value |
|---|---|---|
| Loans the fund originated | 140.0 | 133.0 |
| Loans bought in the secondary market | 200.0 | |
| Other assets (equity tickets, structured positions) | 87.0 | |
| Gross assets | 420.0 | |
| Borrowing (not covered by commitments) | 120.0 | |
| Net asset value | 300.0 |
A loan counts as originated when the fund is the original lender, or when a third party or vehicle originates it on the fund's behalf and the fund or its manager was involved in structuring the loan or setting its characteristics before taking the exposure. The 200.0 of loans bought in the secondary market, without that involvement, are outside the numerator.
Originated loans, notional ÷ NAV = 140.0 ÷ 300.0 = 46.7%
The same loans as a share of gross assets: 133.0 ÷ 420.0 = 31.7% at carrying value, 33.3% at notional.
In Excel, with notional in B2 and NAV in B8: =B2/B8, compared with 0.5.
The investment team describes this as a fund with about a third of its book in its own loans. The directive sees 46.7 per cent, 3.3 points from the line. The gap between the two descriptions is the leverage: at 140 per cent, every point of gross assets is 1.4 points of NAV.
The line is reached when NAV falls to 140.0 ÷ 0.50 = 280.0, or when originated notional rises to 0.50 × 300.0 = 150.0. Each of these happens in the ordinary life of a fund.
NAV loss that reaches the line: 300.0 − 280.0 = 20.0, or 6.7% of NAV
As a markdown on the secondary loan book: 20.0 ÷ 200.0 = 10.0%
As a markdown on the other assets: 20.0 ÷ 87.0 = 23.0%
As a markdown on the originated loans themselves: 20.0 ÷ 133.0 = 15.0%
New origination at par with NAV unchanged: 150.0 − 140.0 = 10.0
The third line is the counter-intuitive one. Marking down the fund's own loans does not reduce the ratio, because the numerator is the notional value and does not move. The loss reduces NAV, and the ratio rises. A troubled originated book pushes a fund into the regime, not out of it.
A distribution does the same. Repayments on the secondary book, paid out to investors as a 20.0 distribution, leave originated notional at 140.0 and NAV at 280.0: exactly 50.0 per cent. A closed-ended fund in its harvest period, returning cash from the parts of the portfolio that mature first, can drift across the line without making a single new loan.
| Share of gross assets | Leverage 100% | Leverage 140% | Leverage 180% |
|---|---|---|---|
| 25% | 25.0% | 35.0% | 45.0% |
| 30% | 30.0% | 42.0% | 54.0% |
| 35% | 35.0% | 49.0% | 63.0% |
| Share that reaches 50% of NAV | 50.0% | 35.7% | 27.8% |
An unlevered fund needs half its assets in originated loans to reach the line. At 180 per cent leverage it needs 27.8 per cent. Using borrowing to scale a secondary or multi-strategy credit book, while keeping a minority of originated deals, is the quickest way to become a loan-originating AIF without intending to.
The common mistake is to measure the share on the portfolio report, which is built on gross assets at carrying value. That produces 31.7 per cent here and a comfortable answer. The directive's measure is notional over NAV, and it produces 46.7 per cent. The second mistake is to test once, at launch. The ratio depends on NAV, and NAV moves with every valuation, distribution and drawdown of the facility, so the test belongs in the quarterly compliance monitoring, with the headroom stated as the loss, the origination and the distribution that would cross it.
The other limb does not need a number. A fund whose investment strategy is mainly to originate loans is loan-originating whatever its ratio on a given day. The 50 per cent test catches the funds whose documents say something else.
The scoping table, with one column per fund, both limbs of the test and the write-down that carries each fund across, is in the free workbook for this case. What happens to the leverage cap once a fund is inside the regime is worked in how much markdown breaches the 175 per cent leverage cap.
On net asset value. The second limb of the definition compares the aggregate notional value of the loans the fund has originated with its NAV. In the worked case originated loans are 33.3 per cent of gross assets by notional but 46.7 per cent of NAV, because the fund runs at 140.0 per cent leverage. Borrowing pushes a fund towards the line.
Only loans the fund originated count, either as original lender or through a third party or vehicle where the fund or its manager was involved in structuring the loan or setting its terms before taking the exposure. In the worked case the 200.0 of loans bought in the secondary market are outside the numerator, but a 10.0 per cent markdown on them still carries the fund across the line by reducing NAV.
No, it increases it. The numerator is the notional value, which a markdown does not change, while the loss reduces NAV. In the worked case a 15.0 per cent markdown of the originated loans themselves takes NAV from 300.0 to 280.0 and the ratio from 46.7 to 50.0 per cent.
Chapter 2 of The AIFMD II Handbook calls the fund scoping table the most useful artefact of the whole implementation; the companion files compute it fund by fund. 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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