Luxembourg's financial regulator, the Commission de Surveillance du Secteur Financier, has indicated for the first time that alternative investment funds domiciled in the Grand Duchy should, in principle, be allowed to become original lenders.

According to version 10 of its 'frequently asked questions' on AIFs (the first version appeared in June 2013) the regulator has written: "Loan origination by an AIF is the process, initiated by its AIFM or, where applicable, by the AIF itself, of actively creating/granting/extending a loan as part of its investment policy. This concept refers to, and may comprise all relevant steps in the origination process, that is, among others, receiving and processing loan applications, performing the credit assessment and borrower selection, setting the characteristics of a specific loan (e.g., pricing (interest rates and fees), type of documentation, collateral requirements), monitoring, servicing and provisioning. Thus, the AIF becomes the original lender and the lending process is part of its investment policy."

By and large, loan participation/acquisition by an AIF is the process, initiated by its alternative investment fund manager (AIFM) or, where applicable, by the AIF itself, of purchasing/acquiring all or parts of an existing loan or package of loans (whether fully drawn or not) on the secondary market from a third party after its origination. It also refers to any other way for the AIF to acquire loans as an investment apart from loan origination (such as e.g. participation (or sub-participation) in syndicated loans, consortiums, club deals). Loan participation/acquisition is thus only relating to parts of the overall loan process, while loan origination encompasses in particular the process of the initial granting and pricing of the loan.

The regulator asks itself the question: "Is loan origination an allowed activity for AIFs in Luxembourg?" The answer is yes: "In principle, loan origination by AIFs is permissible as the Law of 2013 and the Alternative Investment Fund Managers' Directive (AIFMD), as well as the respective product laws or regulations applicable to AIFs (if any) do not prohibit this activity. In the particular case of AIFs qualifying as ELTIF(s), EuSEF(s) or EuVECA(s), the granting of loans is also explicitly mentioned and permitted under certain conditions in the respective EU regulations."

There are, however, things that the CSSF wants to authorise only on a case-by-case basis. These include the ways in which the AIF or AIFM handles risks, appoints people with the right experience, and keeps an eye on things.