Private Credit Funds: Macroprudential Risks and Limits of AIFMD II

In the corporate lending landscape, a relatively new market participant has recently established a growing presence: private credit funds. These are alternative investment funds that originate, participate in, or restructure loans, or otherwise extend credit, primarily to companies.

With an average annual growth rate of 17% between 2019 and 2024 in Europe, private credit funds have been growing rapidly. By acting as an alternative lender, such funds can diversify sources of lending and provide financing to borrowers and sectors that are underserved by banks. Several studies also point to their potential role as stabilisers, especially during periods of market stress, based on their counter-cyclical lending activities.

There can be no good without evil, however. Global financial stability watchdogs such as the International Monetary Fund (IMF) and the Financial Stability Board (FSB) warn that private credit funds may pose risks that can adversely affect the stability of the financial system (i.e. macroprudential risks). Surging redemption requests since late 2025 that compelled major asset managers to halt redemptions, as well as the increasing volume of troubled loans in the private credit market, have only contributed to concerns. Although assessing the likelihood of macroprudential risks’ materialisation and their potential impacts ex ante is inherently difficult, weak spots can nevertheless be identified. These include private credit funds’ interconnectedness with the broader financial system, liquidity mismatches (funding illiquid private credit loans with relatively short-term capital), leverage and concentration.

To address these potential macroprudential risks, the EU legislature has amended the Alternative Investment Fund Managers Directivewith the adoption of Directive (EU) 2024/927 (AIFMD II). To that end, AIFMD II introduced specific macroprudential safeguards, including a closed-ended structure requirement, liquidity management tools, a concentration limit, and leverage limits. In my recent contribution, I critically assess the scope and effectiveness of these safeguards in addressing two principal areas of macroprudential concern as identified by the FSB: interconnectedness and liquidity mismatches.

An important subset of AIFMD II’s safeguards is private credit-specific, in that these safeguards apply exclusively to the managers of alternative investment funds (AIFs) that originate loans. Not all private credit funds originate loans, however. A nearly as prevalent category of private credit funds acquires and restructures existing loans originated by banks or other entities, without originating loans ab initio: loan-participating funds. Since AIFMD II’s private credit-specific measures are only applicable in relation to AIFs that originate loans, loan-participating funds do not fall within the scope. In my paper, I argue that this differentiated treatment appears to lack a convincing justification with regard to certain macroprudential safeguards addressing interconnectedness and liquidity mismatches (ie a closed-ended structure requirement, a concentration limit and specific leverage limits), and raises regulatory arbitrage concerns.

Another point of concern for financial stability is the apparent primacy of investors’ interest in the liquidity management framework. To contain liquidity-mismatch risk, AIFMD II introduced a harmonised set of liquidity management tools (LMTs), requiring managers of open-ended AIFs to include at least two in the fund documentation. Suspensions and side pockets are additionally available in exceptional circumstances. Both the specifically selected and additional LMTs need to be activated or deactivated by the asset manager in the interest of investors.

Since asset managers must at all times act in the best interests of the AIF and its investors, activating LMTs in their interest is understandable and coherent. However, liquidity mismatches not only create risks for AIF investors, but may also pose risks to the broader financial system. As the interests of financial stability and those of investors may diverge, and asset managers should not be expected to safeguard the former at the expense of the latter, AIFMD II grants competent authorities the power to require the activation or deactivation of suspensions. This appears to be a useful power of last resort where financial stability considerations necessitate supervisory intervention, particularly because suspensions are arguably the most direct tool that can contain the liquidity-mismatch risk. 

Yet, just like asset managers, competent authorities can also exercise this power only ‘in the interest of investors”, where there are ‘risks to investor protection or financial stability’. Pursuing investors’ interest where the trigger is a risk to investor protection is conceptually coherent. The position is less straightforward, however, where the trigger is a risk to financial stability. A financial stability risk alone may justify considering supervisory intervention, but the competent authority must apparently still be able to characterise that intervention as being in the interest of investors. The interest of investors, however, may not always align with the interest of financial stability. My analysis consequently suggests that requiring competent authorities to establish that the exercise of this macroprudential power is also in the interest of investors may hinder its effectiveness in certain cases of macroprudential concern.

Significant uncertainties therefore remain as to whether the measures introduced under AIFMD II are as effective as intended from a macroprudential perspective. My paper maps such uncertainties and identifies potential shortcomings under AIFMD II, as well as opening new lines of inquiry.

The authors’ article is available here. 

Boran Akyildiz is a PhD Researcher at KU Leuven.