AIFMD II: What UK AIFMs and Delegated Investment Managers Need to Know

The EU’s revised Alternative Investment Fund Managers Directive came into force in April 2024. For UK firms, Brexit did not create distance from these rules — it created complexity. Here is what you need to understand, from both sides of the delegation chain.

The context: an EU directive with a long reach

AIFMD II — formally Directive (EU) 2024/927 — amends the original 2011 Alternative Investment Fund Managers Directive. It is not a root-and-branch rewrite. It is a targeted set of amendments designed to close specific gaps identified over a decade of AIFMD application: excessive delegation without substance, inadequate liquidity management in open-ended funds, an absence of rules for loan-originating strategies, and inconsistencies in third-country access.

Member states had until 16 April 2026 to transpose AIFMD II into national law. The major fund domiciles — Luxembourg, Ireland, the Netherlands — are already there.

UK firms reading this might reasonably ask: why does an EU directive appear on our agenda? The answer lies in the structure of the UK fund industry. UK-based investment managers are deeply embedded in the European fund ecosystem — managing EU-domiciled AIFs, acting as delegated portfolio managers under EU AIFMs, and marketing into EU member states under national private placement regimes. Brexit changed the regulatory passport; it did not change the operational architecture.

What actually changed:

Delegation and Substance

This is the area of greatest relevance to UK managers. AIFMD II introduces explicit rules — backed by ESMA technical standards — to prevent EU AIFMs from delegating so many functions that they become “letter-box entities”: legal shells that formally manage a fund but in practice perform no investment management.

Under the new framework, EU AIFMs must be able to demonstrate that they retain genuine decision-making capability and oversight, even when substantial delegation occurs. Regulators in Luxembourg and Ireland will assess this at authorisation and on an ongoing basis. For the first time, delegation data must be reported to ESMA, which will publish aggregate statistics — creating a transparency layer that was previously absent.

The practical consequence for UK delegated managers is clear: your EU AIFM counterparty will face greater scrutiny, and that scrutiny will extend to the delegation relationship. Expect more detailed delegation agreements, more structured oversight frameworks, and more regular monitoring reports flowing back to the EU entity.

Liquidity Management Tools

AIFMD II mandates that managers of open-ended AIFs must have at least two liquidity management tools — from an ESMA-specified menu including redemption gates, notice periods, side pockets, redemption in kind, and anti-dilution levies — available for activation in stressed conditions. Crucially, having them available is a minimum: managers must also have documented policies for when and how they would be deployed.

This requirement will necessitate updates to fund prospectuses, articles of association, and internal liquidity risk management frameworks. For UK managers running EU-domiciled open-ended AIFs, this work is already urgent.

Loan-Originating Funds

AIFMD II creates, for the first time, a harmonised EU framework for AIFs whose primary strategy is to originate loans directly. These loan-originating funds (LOFs) face new rules on leverage limits (generally a 3:1 ratio for open-ended, 9:1 for closed-ended), mandatory risk retention (the fund must retain a 5% vertical slice of any originated loan that is sold or securitised), and portfolio concentration limits.

UK credit managers running EU-domiciled private debt vehicles should take specific legal advice on whether their fund structures meet the LOF definition and, if so, what changes are required.

Depositary Rules

AIFMD II allows greater flexibility to appoint depositaries in EU member states other than the AIF’s home state, subject to regulator approval. This is a minor operational relief for managers running funds in smaller EU markets where depositary capacity is limited.

The UK regulatory picture

The UK retained a version of the original AIFMD into domestic law following Brexit. That regime has not been updated to mirror AIFMD II, and there is no automatic mechanism for it to do so. The FCA is, however, consulting on several of the same underlying issues through its own reform programme — most notably through Discussion Paper DP23/2 on fund liquidity management and subsequent consultations on a UK liquidity management tool framework.

UK managers should therefore anticipate that UK rules will move in a broadly similar direction to AIFMD II over the coming years, but on a separate timetable and potentially with different calibration. Running a single compliance programme across both regimes will require careful mapping of where they converge and where they differ.

Risk and priority by firm type

Perspective A:

The UK AIFM View

If your firm is authorised as an Alternative Investment Fund Manager in the UK, you operate under the UK’s retained version of the original AIFMD. AIFMD II does not automatically apply to you. But the nature of the UK fund industry means it will affect you — in some cases directly and immediately, in others as a forward regulatory signal.

The critical question is not whether your FCA authorisation puts you in scope of AIFMD II. It is whether any of your funds, your distribution activities, or your operational structures are EU-facing.

Managing EU-Domiciled Funds

If you manage one or more AIFs that are domiciled in the EU — a Luxembourg SICAV, an Irish ICAV, a Dutch fund — those funds are directly subject to AIFMD II, regardless of where you as manager are located. The obligations flow to the AIF and its legal AIFM, not to you personally. But in practice, you are the investment manager of those funds, and the changes will land in your lap.

The most urgent implication is the liquidity management tool (LMT) requirement. For any open-ended AIF you manage, your fund documentation must now provide for at least two LMTs from the ESMA-approved list. Review your prospectuses, articles, and limited partnership agreements. If you do not currently have two LMTs explicitly documented and operationally ready, this is a priority remediation item.

For loan originating strategies, the picture is more complex. AIFMD II creates a specific sub-regime for loan-originating funds with mandatory leverage caps and risk retention rules. If your EU-domiciled vehicle originates loans, take legal advice on whether it falls within this definition and what structural changes may be required.

NPPR Marketing Into EU Member States

UK AIFMs that market into EU member states do so under each country’s national private placement regime. AIFMD II does not directly govern NPPR — member states retain discretion over their own regimes. However, several EU states are informally aligning their NPPR conditions with AIFMD II standards as a condition of market access.

This means that in practice, you may be expected to demonstrate AIFMD II-equivalent liquidity management, risk policies, and reporting even when marketing under NPPR. Germany, France, and the Netherlands are among the jurisdictions to watch. Review the current NPPR conditions in every jurisdiction where you actively market, and assess whether changes to your fund documentation or reporting would be required to maintain access.

Watching the FCA

The FCA’s own reform programme is moving broadly in the same direction as AIFMD II, albeit more slowly. FCA Discussion Paper DP23/2 and subsequent consultation papers signal that the UK will introduce its own LMT framework and may tighten substance expectations for UK managers. UK AIFMs should therefore treat AIFMD II not just as an EU issue but as a preview of where UK rules may land.

Priority Actions for UK AIFMS

1. Audit all open-ended EU-domiciled AIFs for LMT compliance and update documentation.
2. Review NPPR conditions in each active marketing jurisdiction for emerging AIFMD II alignment requirements.
3. If managing loan originating EU vehicles, take specific legal advice on the LOF sub-regime.
4. Track FCA consultations on UK AIFMD reform for domestic implications.

Perspective B:

The UK Delegated Investment Manager View

If your firm is a UK-based investment manager acting as a delegated portfolio manager — receiving a mandate from an EU-authorised AIFM or Management Company — AIFMD II does not regulate you directly. You are not the AIFM. But you sit at the centre of the relationship that AIFMD II is specifically designed to scrutinise.

The delegation provisions of AIFMD II exist precisely because regulators observed that some EU AIFMs were authorised legal entities with little genuine investment management capability — delegating substantially all portfolio management to non-EU firms including UK managers. The reforms are intended to ensure that the EU AIFM is a real manager, not a regulatory pass-through.

What your EU AIFM Counterparty Now Faces

Your EU AIFM must now be able to demonstrate to its home-state regulator that it retains genuine substance and oversight capability, even while delegating portfolio management to you. This means it needs to employ sufficient staff with genuine expertise to monitor your performance, challenge your decisions, and replace you if needed. It must have a documented oversight framework with defined escalation processes.

ESMA will receive data on delegation arrangements across the EU and will publish aggregate statistics, creating a new layer of regulatory visibility into cross-border delegation chains. Regulators in Luxembourg and Ireland are actively using AIFMD II as a basis to challenge ManCo structures they believe are insufficiently substantive.

Reviewing Your Delegation Agreement

Delegation agreements entered into under the pre-AIFMD II framework may not adequately support the oversight obligations your EU AIFM counterparty now faces. Review the agreement with particular attention to the following areas:

• Reporting obligations: Does the agreement specify the frequency, format, and content of reports to the AIFM? If not, expect requests to formalise this.
• Oversight rights: Does the AIFM have explicit rights to audit, review, and challenge your investment decisions? AIFMD II-compliant agreements typically need this spelled out.
• Termination and transition: Does the agreement include workable termination rights and transition assistance provisions? Regulators expect the AIFM to be able to substitute the delegate.
• Sub-delegation: If you sub-delegate any functions, this chain now receives additional scrutiny. Review sub-delegation arrangements against the new framework.

Positioning your Firm

AIFMD II creates an indirect incentive for EU AIFMs to consolidate delegation relationships with substantive, well-governed managers. Firms that are responsive, well-documented, and provide strong oversight infrastructure to their AIFM counterparties will be better positioned to retain and grow mandates. Those that resist enhanced governance requirements may find their EU relationships under pressure.

Consider how your firm presents its own substance, controls, and governance to EU AIFM counterparties. This is increasingly part of the commercial relationship, not just a compliance checkbox.

Priority Actions for Delegated Firms

1. Proactively engage your EU AIFM counterparties. Ask how they are implementing AIFMD II and what they will need from you.
2. Review all delegation agreements for adequacy of oversight, reporting, and termination provisions.
3. Assess your own reporting infrastructure. Can you provide the governance-quality information your EU AIFM counterparties will need?
4. If you sub-delegate, review those arrangements carefully. The new rules extend scrutiny down the chain.
5. Position your firm’s governance and substance as a commercial differentiator in EU mandates, not merely a compliance requirement.

This article is intended as general information and commentary. It does not constitute legal or regulatory advice. Firms should seek specialist counsel in relation to their specific circumstances and obligations under applicable law.

References:
·  Directive (EU) 2024/927 (AIFMD II)
·  ESMA consultation papers on LMT technical standards
·  FCA DP23/2 
·  Directive 2011/61/EU (AIFMD)