02 March 2015

Germany: Amendments to Investment Ordinances - what is the impact on private equity and infrastructure funds?

This week the German government approved its long awaited amendment to the Investment Ordinance (Anlageverordnung) and the corresponding ordinance for pension funds. They govern the asset allocation of German insurance companies and certain pension funds and are expected to come into force within the next few days. They also apply to most occupational pension schemes for certain professions (Versorgungswerke). Many investors subject to these ordinances traditionally allocate private equity and infrastructure investments to the so-called “equity quota”, which permits them to invest up to 15% of their "restricted assets" into this asset class.

Changes to the “equity quota”

Under the new rules, investments can only be allocated to the equity quota if they meet the following conditions:

(i) The fund is a closed ended alternative investment fund subject to the jurisdiction of an EEA or OECD member state; and

(ii) The fund is managed by (A) a German resident manager being either AIFMD licensed or AIFMD/EuVECA registered (a “domestic manager") or (B) an EEA/OECD resident manager subject to investment supervision and holding a license or registration “comparable” to a domestic manager.

In addition, the fund may only invest in equity shares, equity-like assets and “other instruments of corporate financing” (which covers subordinated shareholder loans according to published technical guidance).

Private equity funds should be able to fall within these conditions, although for funds outside of the EEA but within the OECD it is unclear exactly which foreign licenses and registrations are “comparable” to those of a domestic manager.

For funds of funds, there is no look through to the underlying funds so the criteria only needs to be satisfied at the fund of funds level, meaning fund of funds will generally be able to qualify for the equity quota.

Alternatives to the equity quota

Funds that are unable to qualify under the equity quota may be able to qualify for the new alternative funds quota to which investors will be allowed to allocate 7.5% of restricted assets. It is only available to EEA funds with EEA managers but EU based/managed infrastructure funds should qualify for this quota, although depending on the type of investments they make, they may also qualify for the equity quota.

Grandfathering

The ordinances provide for grandfathering so investments made as part of the equity quota prior to the new rules being brought in will still qualify for the equity quota.

Interaction with Solvency II Directive

Solvency II will come into force in January 2016 and will replace these ordinances for most insurance companies. However, the Investment Ordinance will continue to be relevant for many Versorgungswerke after this date.

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