The AIFM Directive 2011 /3061 / EC (AIFMD) provides harmonised regulation across Europe of managers of alternative investment funds (AIFs). It must be transposed into national law by 22 July 2013. The German legislature is implementing the AIFMD regulations by way of the new Capital Investment Code (KAGB-E)1 which replaces the previous Investment Act in its entirety. This is the first time that a common legal framework has been established for all types of funds (including closedend fund structures). As such, investment law will only distinguish between UCITS (already regulated across the EU) and alternative investment funds (AIFs) in the future.
The definition of an “investment asset pool” is of central importance here with regard to implementation. It provides a reference point for several other regulatory and fiscal aspects. Although the German financial regulator, BaFin, issued a draft interpretation of the concept of an investment asset pool for consultation on 27 March 20132, there is still considerable uncertainty. Section 1(1) of the KAGB-E defines the legal concept of an investment asset pool as follows:
- An undertaking for collective investment (UCI) exists which raises capital from a number of investors
- for the purposes of investing it in accordance with a defined investment policy
- for the benefit of those investors, and
- is not a commercial company operating outside the financial sector.
As set out in the explanatory notes on the draft bill, the KAGB-E uses a very widereaching material definition of an investment asset pool in line with the AIFMD definition3.
- Undertaking for collective investment which raises capital from a number of investors
The concept of a UCI is not defined in greater detail either in the AIFMD or the KAGB-E. However, it is possible to deduce that a UCI is an entity that exists for the purpose of investing funds raised from the public on joint account, irrespective of its legal form4. They are therefore intended to include – partly to distinguish them from individual portfolio management mandates – organisational forms which create separate asset pools that can be allocated to several investors5. In its discussion paper6, ESMA views a UCI as an entity which pools capital raised from investors and whose purpose is to achieve a return for the investors through the sale of assets. BaFin requires the participation by the investors of both the profits and losses from the performance of the assets in which the entity is invested.
This characteristic should be relatively simple to assess in practice, based on the deliberately wide scope of the KAGB-E. However, BaFin is of the opinion that shareholder contributions and typical silent partnerships or profit participation rights can also be UCIs.
- Defined investment policy
In accordance with the explanatory notes on the KAGB-E, the presence of a defined investment policy requires that the criteria according to which the capital is to be invested are precisely set out in writing in a way that exceeds the scope of a general business strategy. The investment criteria are precisely determined within the framework of an investment policy and the fund manager’s scope for action is limited accordingly.
At the level of EU legislation, ESMA has set out the following additional aspects for the purpose of indicating the existence of an investment policy7:
- Established investment guidelines (categories of asset, geographical regions, leverage, holding periods, risk diversification)
- Disclosure to investors plus requirement to disclose changes to the investment policy and gain consent for these from investors.
Judging whether there is an investment policy may actually be considerably more complicated; some start-ups, for example, may also have relatively detailed business plans which would then have to be distinguished from an investment policy. The name of the document in question can at best act as an indicator.
- Investment for the benefit of the investors
The KAGB-E and its explanatory notes do not contain any further details on this aspect, so general criteria have to be applied. According to BaFin, for instance, the capital may not be invested solely for the benefit of the company itself, as otherwise there would be no investment for the benefit of the investors.
- Not a commercial company operating outside the financial sector
Normal commercial companies are not intended to be covered by the KAGB-E. However, no further details are provided on this exception either in the KAGB-E or its explanatory notes. The only statement made is that the very broad characteristics specified by the AIFMD in the definition of investment asset pools lead to a risk that manufacturing and other commercial enterprises which are not funds and which were not intended to be regulated under the AIFMD may fall within the scope of the law.
The question thus arises as to what constitutes a normal commercial company that is not covered by the KAGB-E legislation. The lack of specific rules, combined with BaFin’s tendency to regard activities as subject to regulation if in doubt, will probably make this the most difficult issue to determine.
The following characteristics could be potential indicators of the existence of a normal commercial company:
- the lack of a defined investment policy8,
- See explanatory notes on the draft bill of the KAGB, part B, section 1 (1), para. 1
- the company involved is a commercial enterprise which is also subject to trade tax,
- entrepreneurial activity takes place in the form of creating or increasing value through the company’s own efforts
In BaFin’s opinion, enterprises which operate facilities themselves (e.g. biogas, solar or wind power plants) as part of their day-today business without outsourcing are commercial companies. The same applies to project development and real estate operation, which are to be regarded as commercial activities. However, this is not the case for enterprises which acquire, lease or sell properties. These can be viewed as investment asset pools.
In practice, it will therefore be very difficult to establish a sensible scope for the KAGB that prevents it from being applied to normal commercial entities.