Germany: BaFin Consultation 03/2013 – Scope Of The KAGB-E/Interpretation Of The Term "Investment Fund"

On March 28, 2013 the Federal Financial Supervisory Authority ("BaFin") published a consultative draft guidance notice including a Q&A on the scope of the draft Capital Investment Act ("KAGB") as well as the interpretation of the term "alternative investment fund (AIF)" ("Draft").

With regard to the interpretation of the term "alternative investment fund" the Draft does not contain any major news as it mainly refers to ESMA""s consultation paper "Guidelines on key concepts of the AIFMD" of December 19, 2012 ("ESMA-Guidelines", see our client information of December 21, 2012). Comments on the Draft should be submitted to BaFin by April 12, 2013.

In practice, the Draft is of great importance, since due to the very broad definition of the term "alternative investment funds" as set out in the AIFM Directive it still exits considerable uncertainty as to when the KAGB is even applicable. In particular, such question is being discussed with respect to real estate companies, joint venture undertakings, carried interest and co-investment vehicles. However, no major news arises from the consultative Draft at this point.

I. Interpretation of the term "Investment Funds"

The Draft firstly stipulates the individual legal characteristics for the term investment fund. BaFin essentially takes reference to the ESMA Guidelines. The legal criteria of an investment fund are:

  • collective investment undertaking,
  • which from a number of investors
  • raises capital,
  • with a view to investing it in accordance with a defined investment strategy for the benefit of those investors and
  • not being a commercially operating company outside the financial sector ("Alternative Investment Fund").

1. Undertaking

According to BaFin, the term "undertaking" must be interpreted broadly, covering all possible legal forms. Further, it does not matter in which form the investor is involved, so that the participation may be under company law, a membership or contractual right (e.g. silent participations, jouissance rights or bonds).

2. For collective investment

According to the Draft, a "collective investment" exists in particular if there is a profit and a loss participation in the performance of the assets in which the undertaking is invested. In this sense, the investors"" compensation for the capital contribution must not be a fixed amount but performance related. As a result, no "collective investment" shall exist if the investor has been granted an unconditional right for repayment of its capital contribution.

3. Raising capital from a number of investors

Also with respect to the term "raising capital from a number of investors", the Draft refers to the ESMA-Guidelines, pursuant to which such criterion is met if

  • taking direct or indirect steps to procure the transfer or commitment of capital by one or more investors to an undertaking for the purpose of investment with a view to generating a pooled return for the investors; and/or
  • commercial communication takes place between the undertaking seeking capital or a person or entity acting on its behalf (typically, the AIFM), and the prospective investors, which aims at procuring the transfer of investors"" capital.

The Draft clarifies that because of the "and/or combination", this criterion is already fulfilled if only one of the two preconditions are met.

The Draft also states that a "number of investors" already exists if according to the undertakings"" investment rules, the statutes or the partnership agreement the number of potential investors is not limited to one investor (cf. also sec. 1 para. 1 sentence 2 KAGB-E). Thus, this criterion is already fulfilled when in fact only one investor is invested in the undertaking, but theoretically it is possible that more investors can participate.

Intermediary undertakings in which only the Investment Fund is invested will be regularly structured in that way to ensure that they will not be considered as Investment Funds. Further, often the criterion of raising capital within the meaning of above should not be met if these undertakings were set up for the purpose of acquiring the assets. This should also be true regarding many carried interest and co-investment vehicles where the partners of such vehicle decide to form such vehicle rather than the vehicle or its manager approaching the partners to make an investment.

4. Defined investment policy

Also concerning the term "defined investment policy" the Draft basically only cites the ESMA-Guidelines. Additionally, the Draft points out that the main criterion of a defined investment policy "" as opposed to a company""s general business strategy "" is that the investment criteria are determined in detail so that the AIFM""s room for maneuver is restricted. With respect to special purpose vehicles an investment policy within the meaning of the aforementioned is not determined: unlike an Investment Fund the company agreement does not foresees for example any investment restrictions or any distribution policy.

5. Investment for the benefit of investors

The Draft stipulates that the undertaking for collective investments must invest its raised capital for the benefit of its investors. According to the Draft, this is not the case where the raised capital is invested for the benefit of the undertaking itself, which, for instance, would be the case if bearer bonds are issued for purposes of financing the general business activities of the issuer.

6. No operating company

In order to qualify as an Investment Fund the undertaking further must not be an ordinary company with a general business purpose. Also with respect to this criterion, the Draft also cites the ESMA-Guidelines. Particularly, the production of goods or the storage of raw materials are mentioned as "operating activities". However, also companies which make investments do not qualify as Investment Funds provided that they also run a day-to-day business. In this sense, particularly project development activities in the real estate sector are considered to be operating activities (see below Error! Reference source not found..). Companies which operate facilities (e.g. biogas, solar energy or wind plants) in the course of ongoing business operations (day-to-day business) by themselves and which do not outsource activities are deemed ordinary companies with a general business purpose.


The questionnaire addresses frequently asked questions on the scope of the KAGB-E. Hereafter, we have summarized the relevant aspects for private equity and real estate funds. BaFin has announced to constantly update the questionnaire.

1. Real estate stock company

(Listed) real estate stock companies should not, per se, be outside the scope of the KAGB-E.

However, (listed) real estate stock companies should be operating companies and thus no Investment Funds, if

  • their object is predominantly targeting project development (conception, acquisition, development of the real estate and subsequent sale of the self-developed real estate) as well as
  • they operate the real estate by themselves (e.g. operation of a hotel or a care facility).

BaFin does not consider the acquisition, the renting, the lease, the management and the sale of real estate as operating activity. If this is the purpose of the (listed) real estate stock companies a differentiation should be made based on the criterion "defined investment strategy" to "corporate strategy". A corporate strategy and thus, no Investment Fund should be assumed, if

  • the business object of the (listed) real estate stock company is very broad and
  • the investment criteria are not clearly defined.

The statements with respect to (listed) real estate stock companies should also be applicable to real estate companies with other legal forms.

With respect to special purpose vehicles an investment policy within the meaning of the aforementioned is rather not determined: unlike an Investment Fund the company agreement often does not foresees for example any investment restrictions or any distribution policy.


On the other hand, BaFin considers a REIT within the meaning of sec. 1 para. 1 of the German REIT Act ("G-REITs") as Investment Fund because its statutory object is similar to the object of a real estate investment fund and hence, the G-REIT does not pursue a corporate strategy but a defined investment strategy.

BaFin expressly refers to G-REITs only. As a result, REITs from other jurisdictions which have a broader objective could not qualify as Investment Fund and hence would be outside the scope of the KAGB-E.

3. Mittelständische Beteiligungsgesellschaft

A so-called Mittelständische Beteiligungsgesellschaft should not qualify as Investment Fund if it does not invest for the benefit of its investors but for the public benefit for economic development purposes only. A "Mittelständische Beteiligungsgesellschaft" is an investment company whose activity is concentrated in the provision of equity and quasi-equity instruments to medium-sized companies with the objective of regional business development.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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