Market Overview – State of the Market
Germany is frequently used by advisers and managers for the formation of venture capital, private equity and similar closed-end alternative investment funds, as well as for retail funds wherever the manager of the respective investment fund is located in Germany – ie, Germany is generally not used as a domicile for structuring alternative investment funds or retail funds by non-German advisers or managers. Typically, German private equity or venture capital funds are structured as limited partnerships that are transparent for German tax purposes.
German resident institutional investors and German family offices are frequent targets of fundraising activities for venture capital, private equity and similar alternative investment funds located in Germany or various other jurisdictions around the world.
Alternative Investment Funds – Fund Formation
Fund Structures
The typical legal forms of investment funds used in Germany are limited partnerships, investment stock corporations and contractual funds with no legal personality of their own (Sondervermögen).
The most frequently used legal form for private funds is the limited partnership, whereas retail funds, undertakings for the collective investment in transferable securities (UCITS) funds and real estate funds are more often structured as contractual funds. A key difference is that a limited partnership is transparent for German tax purposes, whereas the rules of the German Investment Tax Act apply in respect of corporate fund structures and contractual funds treating such funds as opaque entities.
Common Process for Setting Up Investment Funds
The process for setting up an investment fund in Germany differs for registered sub-threshold managers and fully licensed managers of alternative investment funds. The regulation of investment funds in Germany is primarily exercised through the regulation of the respective man ager, who is required to apply for a full licence or to be registered with the German supervisory authority for financial services (BaFin) under the German Investment Code (KAGB). The KAGB implements the European Alternative Investment Fund Managers Directive (AIFMD) rules into German law.
Registered Managers – Registration Process Availability
This registration process is available to certain small or medium-sized managers only. The most important category of these small to medium-sized managers is known as a “sub-threshold manager” under the AIFMD and KAGB. In practice, most German alternative investment fund managers outside the real estate area still fall within this category.
Sub-threshold managers under the KAGB are managers with assets under management of not more than EUR 500 million with no leverage at fund level, or not more than EUR100 million if there is leverage at fund level, and who manage so-called special alternative investment funds (“Special AIFs”) only. Special AIFs are AIFs whose interests or shares may only be acquired by professional investors or semi-professional investors (ie, non-retail funds).
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Chambers_Investment Funds 2024_Chapter Germany
This article was first published in: Chambers Legal Practice Guide Investment Funds, 2024 (last updated 8 February, 2024)