Key Takeaways
- • Dechert's third installment on private credit frames U.S. regulation around the Investment Company Act of 1940, which splits vehicles into regulated funds open to retail investors and private funds limited to qualified investors.
- • AIFMD 2.0, effective across the EEA on April 16, 2026, creates a harmonized regime for loan-originating funds (LOFs), which applies in full to funds whose strategy is mainly loan origination or whose originated loans reach at least 50% of NAV.
- • Under AIFMD 2.0, open-ended LOFs may be leveraged up to 175% of NAV and closed-ended LOFs up to 300% of NAV, calculated using the commitment method only.
- • The UK Financial Conduct Authority has confirmed the UK will not implement AIFMD 2.0, so cross-border managers will continue to rely on EU structures such as Luxembourg or Irish funds.
Summary
Dechert's final part of its three-part series on the evolution of private credit markets examines how the U.S. and Europe have developed distinct legal frameworks for private credit funds. The U.S. framework is rooted in the creation of the SEC in 1934 and the Investment Company Act of 1940 (1940 Act). Under that statute, vehicles are either regulated funds that can be offered to retail investors, or private funds that rely on exemptions under Sections 3(c)(7) and 3(c)(1) and are limited to investors meeting minimum financial thresholds or demonstrating sufficient knowledge and experience. Congress created business development companies (BDCs) in 1980, and the SEC adopted Rule 23c-3 in 1993 to establish the interval fund structure.
The principal regulated structures include publicly traded BDCs, non-traded publicly offered BDCs, private BDCs, publicly traded closed-end funds (CEFs), interval funds and tender offer funds. BDCs must invest at least 70% of assets in U.S. private operating companies or U.S. public companies with market capitalization below $250 million, the so-called Good BDC Asset Requirement, and may use higher leverage than CEFs. Interval funds must make periodic repurchase offers, typically quarterly, for 5% to 25% of outstanding shares at NAV. Tender offer funds conduct discretionary repurchases set by fund boards.
In Europe, loan origination by alternative investment funds was largely governed by national rules before AIFMD 2.0. According to Dechert, many jurisdictions treated lending as a banking activity reserved for licensed credit institutions. The 2013 AIFMD introduced a marketing passport and common supervisory standards but left loan origination largely to national law. ESMA issued an opinion on fund loan origination in 2016, and published its final report on open-ended LOF regulatory technical standards in October 2025. AIFMD 2.0 became effective on April 16, 2026, subject to transitional arrangements for existing funds and previously originated loans. Dechert notes that the framework marks a shift toward a more unified and prescriptive, asset-class-specific regime, and that the UK's decision not to implement it will keep cross-border managers in EU fund structures.
The principal regulated structures include publicly traded BDCs, non-traded publicly offered BDCs, private BDCs, publicly traded closed-end funds (CEFs), interval funds and tender offer funds. BDCs must invest at least 70% of assets in U.S. private operating companies or U.S. public companies with market capitalization below $250 million, the so-called Good BDC Asset Requirement, and may use higher leverage than CEFs. Interval funds must make periodic repurchase offers, typically quarterly, for 5% to 25% of outstanding shares at NAV. Tender offer funds conduct discretionary repurchases set by fund boards.
In Europe, loan origination by alternative investment funds was largely governed by national rules before AIFMD 2.0. According to Dechert, many jurisdictions treated lending as a banking activity reserved for licensed credit institutions. The 2013 AIFMD introduced a marketing passport and common supervisory standards but left loan origination largely to national law. ESMA issued an opinion on fund loan origination in 2016, and published its final report on open-ended LOF regulatory technical standards in October 2025. AIFMD 2.0 became effective on April 16, 2026, subject to transitional arrangements for existing funds and previously originated loans. Dechert notes that the framework marks a shift toward a more unified and prescriptive, asset-class-specific regime, and that the UK's decision not to implement it will keep cross-border managers in EU fund structures.
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