Germany is not a typical funds jurisdiction, such as, Luxembourg or the Channel Islands. Nevertheless, Germany has a sizeable alternative funds sector with German-based funds and managers in place, for both direct investment funds as well as fund of funds. Besides domestic fund structures, many fund managers offer cross-border fund structures (such as a German master fund with non-German feeder funds for certain non-German investors). Some German fund managers also use pure non-German fund structures (mostly based in Luxembourg).
As for investors, Germany is a top jurisdiction in Europe with regard to large institutional investors, such as insurance companies, pension funds and pension schemes, as well as family offices and high net worth individuals (HNWIs).
Funds
Types of Alternative Funds
Private equity funds (buyout, venture capital, and growth capital) and real estate funds are the most commonly established funds in Germany. Renewable energy funds and private debt funds are also noteworthy.
Fund Structures
German limited partnerships (GmbH & Co KG) are typically used for closed-end alternative investment funds. The German limited partnership is structurally comparable to the US, UK or Luxembourg limited partnership. It offers limited liability to its limited partners and has as a corporate type, general partner with unlimited liability (though the general partner’s liability is limited to its assets, typically EUR25,000, and thus, effectively, also limited).
The German limited partnership offers the benefits of being tax-transparent and allowing legal flexibility for its governance. It is the market standard for registered fund managers, ie, Alternative Investment Fund Managers Directive (AIFMD) sub-threshold fund managers.
Contractual funds with no legal personality (Sondervermögen) are typically used for open-end funds. Contractual funds can only be established by alternative investment fund managers (AIFM) that are fully authorised under the German implementation of the AIFMD (Directive 2011/61/EU). The contractual fund is often established for real estate funds and non-UCITS securities funds. It is also often used for separate managed accounts as an investment platform for institutional investors.
Regulatory Regime
The German regulatory regime for alternative investment funds (AIFs) is based on the AIFMD. Germany implemented the AIFMD into the German Capital Investment Act (Kapitalanlagesetzbuch, KAGB). The KAGB contains the AIFMD manager-related rules and the AIFMD funds marketing-related rules. It further sets out German-specific “product rules” applicable to AIFs. This overlay of product rules for the AIF, however, applies in general only to fund managers that are fully authorised under the AIFMD.
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Chambers Global Practice Guide_Alternative Funds 2021_Chapter Germany
This article was first published in: Chambers Global Practice Guide, Alternative Funds 2021, 14 October 2021