The new German Capital Investment Act (Kapitalanlagegesetzbuch, KAGB) took effect on 22 July 2013. This marked the end of one of the most important regulatory projects in the German capital markets sector in the past years. It is important as it is the direct result of consultations that took place after the collapse of the Lehman Brothers investment bank and the subsequent international finance and economic crises.
The European Commission launched its consultations on regulating the so-called Alternative Investment Fund Manager (AIFM) in 2009. While originally targeted at regulating hedge fund managers, it soon became clear that the sphere of influence would be broader. The objective was: “one size fits all”, and it was to apply to all previously unregulated capital market products. At the latest, the first drafts for implementation of the directives passed in Brussels in 2011 into German law showed: it also regulates managers of open and closed-end funds.
This Act is a milestone for closed-end funds, because it has now allocated the relevant closed funds from the formerly “grey”, largely unregulated, capital market to the fully regulated “white” capital market. From now on, tangible asset investments must comply with the same obligations regarding reporting, the avoidance of conflicts of interest, the documentation of professional qualification of managers and the control of investor funds as investment funds, open property funds and security funds. The managers and products are also subject to German finance supervision.
However, there is more. With the KAGB, legislature has made it unmistakeably clear that investments in tangible assets, such as real estate, ships, renewable energy, containers, rail vehicles and others, will in future only be possible within closed structures. The only exception is open real estate funds.
By passing this Act, legislature has ack-nowledged the tremendous economic importance of tangible asset investments. A few figures for clarification:
Currently, almost 195 billion euros in tangible asset investments are managed in more than 3,000 individual participations in Germany. Of this amount more than 46 billion euros are attributed to real estate investments. Almost two million people invest in tangible assets, of these almost 500,000 are real estate participations and a growing number of these are in residential properties. Nearly 1.4 billion euros are currently managed in this area in Germany. This includes, for example, funds with apartments in major metropolitan areas as well as projects with student apartments.
Closed funds are of significant importance to the energy transition as well. Almost 7.5 billion euros were invested in tangible asset participations involving renewable energy over the past ten years. In the meantime, these investments provide electricity to almost 1.5 million homes.
As of 22 July, there will be three new forms of closed-type funds, so-called Alternative Investment Funds (AIF). Mixed-risk, public AIF are available to private, semi-professional and professional investors. Non-mixed-risk public AIF are only available to those investors who invest at least 20,000 euros and who fulfil the requirements on their level of knowledge specified in the KAGB. Special AIF are for professionals. Only those who fulfil the requirements on semi-professional and professional investors specified by law may invest in them.
In addition, the Act strengthens the European economic and financial region: as a result of AIFM and KAGB regulation it is now considerably more difficult for funds originating outside the EU to access the domestic market.
Those who wish to invest in tangible assets in the future, without using a closed investment vehicle for this purpose, have only three alternatives, of which two are currently unregulated and thus bear correspondingly higher risks. These unregulated tangible investment alternatives include direct investments and unregulated financial products such as loan structures or debentures. The only regulated alternative is the so-called “collective investment undertakings” in accordance with the AIFM directive described above.
Brussels is providing additional support for German providers of closed tangible investment assets. The EU Commission recently introduced a proposal on so-called European Long-Term Investment Funds (ELTIF). This proposal follows the basic principle that investments in tangible assets, in particular real estate and infrastructure, must always be invested over the long-term. To this end, a new framework will be created in which professional and private investors will in future be able to make long-term investments in real estate or infrastructure projects easily and within fixed limitations. Managing such investments is today already being handled by providers of closed investment assets. This is their core task. In future, there can be a proprietary European investment vehicle for this purpose. This will allow companies to address new investors outside Germany’s borders. The requirement is that the manager is approved by BaFin, the participation option is within the framework of an AIF and that the separate requirements of the ELTIF product regulations are adhered to. Decisive is the fact that this involves a closed structure without the option of returning shares.
The bottom line is:
Closed tangible investment assets are endorsed politically and required by the economy. This new framework and the changes on EU level thus provide clear growth perspectives for providers of closed investment assets.
The author, born in 1972, studied law in Bonn and is an attorney admitted to the bar. Since 2005, he has been the chief executive and spokesman for the VGF Verband Geschlossene Fonds e.V., which since the summer of 2013 has been doing business under the name of bsi Bundesverband Sachwerte und Investmentvermögen e.V.