Germany has created a new limited partnership structure as part of its AIFMD implementation. Barbara Ottawa investigates whether it will rival the long-established Spezialfonds
The German Spezialfonds is not that special anymore. The EU’s Alternative Investment Fund Manager Directive (AIFMD) and Germany’s law to implement it Kapitalanlagegesetzbuch (KAGB) have made it more comparable to other European fund structures, such as those in Luxembourg.
And that is a good thing, according to some. “There are now fewer restrictions regarding Spezialfonds and they are getting closer to the Luxembourg FCG,” says Jörg Homann,
managing partner of Institutional Investment Partners.
The new relaxations allow for higher debt ratios, value-add investments and opportunistic structures, and infrastructure investments. German institutions investing in the latter, for example, had for the most part been confined to Luxembourg vehicles.
However, the blurring of distinctions between German Spezialfonds and Luxembourg structures does not necessarily mean the former will become more attractive to non-German investors.
“I do not expect foreign investors to choose a German Spezialfonds under the new regulations because the way via Luxembourg is more standardised and they already know it,” says Georg Klusak, fellow managing partner at Institutional Investment Partners. “For some US investors there are certain tax agreements with Luxembourg which do not exist with Germany.”
Goesta Ritschewald, managing director at Deutsche Investment KAG, thinks “foreign investors will now look into investing in Germany via a German Spezialfonds” because AIFMD and KABG have given the vehicle more legal certainty. Investors that might not have invested in Germany because they lacked a suitable fund vehicle might now opt for a German Spezialfonds, she says.
But Michael Schneider, CEO of Warburg-Henderson’s Service KAG, IntReal, thinks foreign investors might opt for a third way: Germany’s new limited partnership vehicle.
The Investment KG, or Kommanditgesellschaft, is a type of limited partnership created by the KAGB to drag a largely unregulated closed-ended fund sector under its auspices.
The Investment KG will be a natural home for German infrastructure investors. “We are looking into using this vehicle for alternative asset classes like renewable energies,” says Jochen Schenk, CEO of Real IS.
Fund managers have long been required to establish Kapitalanlagegesellschaften (KAG) businesses in Germany in order to manage Spezialfonds. Some managers have outsourced this requirement and have used third-party Service KAGs and Master KAGs to avoid the costs of setting up their own.
The KAGB now requires all KAGs to register for Kapitalverwaltungsgesellschaften (KVG) license by the middle of 2014 if they want to manage Spezialfonds and the new Investment KG. Fund managers can continue to use a third-party KAG, or KVG as it will now be known.
The new regulatory framework will impose greater reporting, administration and capital requirements. KAGs already have the necessary provisions in place but closed-ended fund providers may have to establish them from scratch.
Just how useful the Investment KG will be is where opinions diverge notably.
Henning Klöppelt, board member at Warburg-Henderson, says the Investment KG is an “interesting addition” to the existing choice of investment vehicles, but Warburg-Henderson is not planning to establish one immediately.
Klöppelt is convinced that the Spezialfonds will remain the vehicle of choice for diversified portfolios, as it is easier to handle for investors than an Investment KG. “With the Spezialfonds, the investor is buying shares in a fund,” he says. “But, with an Investment KG, he is buying shares in the company and has to be listed in the trade register.”
But Klöppelt admitted that the Investment KG could be interesting for institutions wanting to pool their directly held real estate, as the new vehicle might be more tax efficient.
But this highlights a crucial point of contention. The tax environment for the new investment vehicle has not been agreed yet, and no decision is expected to be made before the general election in Germany in autumn, or even before the end of the year.
Currently, German institutions have to pay taxes when they are selling properties to a fund structure – for example, to pool their holdings – and the new vehicle might be exempt from
Peret Bergmann, designated COO of White Label’s Master KVG, points out that pooling has already happened in the past via “private placements” and “club deals”. It remains to be seen whether Investment KGs will be “the more cost-efficient option”, he says.
Investment KGs could prove interesting for Versorgungswerke, Germany’s retirement plans for self-employed workers, according to Klusak. Versorgungswerke currently pay tax if they set up Spezialfonds for foreign investments. “They could be accepted as a tax-exempt company abroad if the new tax environment allows it,” he says.
But Homann says the key will be the complexity as many investors have in the past “shied away from Luxembourg FCPs because the prospectus was too complex”. He adds: “Investment KGs have to offer structures German investors know already.”
Ritschewald is also convinced the Investment KG is a “good vehicle and most effective for pooling, which will make sense especially with large internationally invested institutions”.
But he emphasises that “it will not replace the Spezialfonds” as it is “an addition, not a competition”.
Schneider also sees the Investment KG as an interesting option for international companies seeking to pool their pension assets within Germany, because the “existing German vehicles were so far rather unsuitable”.
Klusak says Institutional Investment Partners has already received interest from two German pension funds to set up an investment KG. But IntReal and Warburg-Henderson have not seen any interest yet.
So it remains to be seen how many investors will opt for the new vehicle once the tax issue is resolved and once the new KVGs have established cost margins for the new product.