A new German law, the Fund Jurisdiction Act (FoStoG) which changed the German Investment Code (Kapitalanlagegesetzbuch, KAGB), came into force at the beginning of August. As we’ve reported previously in REFIRE, the law is designed to make the German fund industry more competitive and reduce bureaucracy.
The amendment also transposed an EU directive into German law, which introduces new rules for the pre-marketing of investment funds and, according to experts, is likely to make the distribution of special alternative investment funds (Special AIF) more difficult.
According to Dorothee Atwell, partner at lawyers Pinsent Masons in Frankfurt and responsible for investment funds and asset management, "Fund providers should keep in mind that numerous new regulations apply with immediate effect. In particular, they should adapt the investment terms of their funds accordingly in order to be able to make use of the relief provided by the new regulations."
Writing in the Pinsent Masons house publication Out-Law, Ms. Atwell says the new law will have an immediate effect on the type of funds available to the industry.
A number of new fund types are now available to the industry. Special AIFs in the form of a so-called "Sondervermögen" without legal capacity can now be set up and managed as closed-end funds, an option that was previously only available to funds in corporate form. This means that private equity and venture capital funds, which are typically launched as closed-end funds, can now also choose the fund vehicle of a Sondervermögen in Germany and no longer have to deal with articles of association, registration of limited partners in the commercial register, shareholders' meetings and shareholders' resolutions.
In principle closed-end funds are then subject to regulations comparable to those for open-end funds. As a counterpart to the closed-end fund in the form of the Sondervermögen, it is now also possible to set up open-ended real estate funds in the form of an open-ended investment limited partnership.
The new KAGB also contains new options for master-feeder structures, in which one or several small funds invest their capital predominantly in a large fund. Previously, closed-end master-feeder structures were not permitted. But it is not possible to retroactively convert closed-end funds into a feeder fund.
In addition, the new law also simplifies the capitalisation of real estate companies which are being held by a 100% participation: shareholder loans are no longer subject to the investment limits imposed by section 240 paragraf 2 KAGB. If the shareholding is less than 100 %, however, the usual investment limits apply. In addition, the financing and encumbrance limit for debt financing in real estate special AIF Sondervermögen is increased to 60%. Experts say this was overdue as it finally aligns the rules of the KAGB with those of the German Investment Ordinance.
The Fund Jurisdiction Act also introduces a new option for investments in infrastructure projects with the open-ended infrastructure special fund. Through this new fund vehicle, capital can be invested in facilities, equipment or structures that serve the community without the need for a public sector partner to be involved in the project.
Another innovation is the possibility of launching so-called development promotion funds, through which investors can invest in development projects in developing and emerging countries. This type of fund can be designed both as an open-ended and as a closed-ended domestic special AIF. "The development funds offer an opportunity to invest capital in conformity with ESG criteria. Germany as a fund location can definitely benefit from this new option. There is already a high demand for such products," said Ms. Atwell.
