Stricter rules for private credit funds operating in Europe are set to be approved by the European Union this week in response to recent rapid growth in the sector and a subsequent uptick in concerns over potential risks to the stability of financial markets, according to a report by Bloomberg.
The new regulations for alternative investment managers including direct lenders, include caps on leverage for private credit funds and other restrictions that the industry is concerned will prove overly burdensome.
Private credit asset managers in the US and Europe are already subject to certain requirements for funds available to retail investors, but the EU is looking to set standards for funds aimed at professional investors too.
The EU’s new directive, which will be voted next by member governments on Wednesday, would introduced a cap on leverage for closed-ended loan origination funds of 300% of their net asset value, with that level falling to 175% for open-ended vehicles.
Those ceilings are typically higher than private credit funds’ usual borrowing levels, with a survey last year by the Alternative Credit Council, the private credit affiliate of London-based AIMA, revealing that 36% of responding firms used no leverage and that debt levels of the “vast majority” that do are below 1.5 times their equity.
Other restrictions in the package, which has been two years in the making and was signed off by the European Parliament earlier this month, include a requirement that funds retain 5% of the notional value of each loan they originate, unless there are specific circumstances. Funds will also be required to diversify their risk and limit exposures if the borrower is a financial institution in a bid to limit the risk posed by ‘interconnections’.
The report cites anonymous EU officials as revealing that, if approved, the new rules would then have to be adopted by member states within two years. Funds would then have an additional year to meet any new requirements for reporting more data to regulators, according to Bloomberg’s sources.
