GERMANY Law and Practice Contributed by: Amos Veith, Jens Steinmüller, Ronald Buge and Stephan Schade, POELLATH
2.5 Fund Finance Accessibility to Borrowing for Funds
often set up under a specific fund category (eg, special funds with fixed investment guidelines). Accordingly, for these funds, investment-type restrictions apply based on the chosen fund cat - egory and individualised investment guidelines (eg, real estate focus or debt fund). Borrowing restrictions depend on the chosen fund category. For instance, special funds with fixed investment guidelines allow short-term borrowing of up to 30% of their net asset value and, for real estate, up to 60% of the real estate value. For German debt funds, the borrowing restriction is 30% of the capital available for investment. If the fund manager is fully licensed, they must appoint a depositary or special private equity custodian for each of its funds (as required by the AIFMD). The valuation and pricing of the fund’s assets must be in line with the AIFMD requirements – ie, fair value. The operational requirements of a fully licensed manager are in line with the AIFMD. In addition, fund managers must adhere to rules that apply to all market participants, such as the EU-based rules on insider dealing and market abuse, transparency, money laundering and short sell - ing. Special internal rules apply to the manager (“manager-internal rules”) regarding debt funds. Sub-threshold managers are only subject to a light-touch regulatory regime. Accordingly, no operational requirements apply, in principle, from a regulatory perspective (except with regards to debt funds).
Funds that are eligible for non-trading treatment from a tax perspective (see also 2.6 Tax Regime ) are generally not permitted to raise debt at fund level nor to provide guarantees or other forms of collateral for the indebtedness of portfolio com - panies. As an exception, tax authorities have accepted that funds can enter into a capital call facility subject to certain restrictions, and the number of funds making use of this concession has increased, as has the number of financial institutions offering capital call facilities to Ger - man funds. Leverage is not permitted for tax reasons and is restricted for regulatory reasons. Restrictions on Borrowings The criteria for non-trading treatment from a tax perspective do not allow borrowings at fund lev - el. As an exception, short-term borrowings to bridge capital calls are accepted by tax authori - ties. While “short-term” has not been defined, borrowings cannot remain outstanding for more than 270 calendar days. Fund managers need to first issue the capital call and can thereafter draw down the amount under the capital call facility. The amount so borrowed is then repaid out of Under German law, the investors’ commitment to the capital of a fund is not an asset that can be pledged in favour of the capital call facility provider. As a consequence, capital call facility agreements entered into by German funds typi - cally provide that payments of capital contribu - tions shall be made to a bank account main - tained with the facility provider that is pledged in its favour. In addition, the facility provider reserves the right to claim payment of capital contributions directly from investors when due, and to enforce the fund’s rights under the fund the capital contributions. Lenders Taking Security
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