Until recently German funds were at a disadvantage over their competitors from other countries as regards the origination of loans. But legislation that entered into force on 18 March 2016 provides a careful relaxation of the restrictions on loan origination for German funds.

Exemptions from the licensing requirement

Under German law, unlike the laws of many other jurisdictions, the making of loans on a commercial basis to business entities (and consumers) requires a banking license under the German Banking Act (Kreditwesengesetz; “KWG”). The license requirement arises not only when a loan is originated, but also when the term of an existing loan is extended (“prolongation”) or when the interest rate is changed as part of a loan restructuring.

In relation to non-German funds, the German banking license requirement applies if the lender addresses itself to the German market via advertisements, internet offerings, personal visits, e-mails, cold calls or the use of intermediaries. In contrast, “passive services,” i.e., where the lender is contacted by the borrower or the borrower’s adviser or by an arranger in the course of a loan syndication, do not trigger a license requirement. This has enabled non-German loan originating funds to operate at least on a limited basis in Germany.

For German funds the situation was different, because a fund from Germany needed a German banking license regardless of the jurisdiction where the borrower is located and there was no exemption from the license requirement in the KWG.

The new legislation amends the KWG to exempt German Alternative Investment Funds (AIFs) and their German fund managers (AIFMs) from the banking license requirement. EU-AIFMs and EU-AIFs are exempt as well.  However, their counterparts from outside the European Economic Area need to continue relying on the “passive services” exemption.

Rules on loan origination to third-party borrowers

Moreover, amendments to the German Capital Investment Code (Kapitalanlagegesetzbuch; “KAGB”) have defined the range of loan products that German AIFs can offer.

Section 285(2) KAGB allows closed-end “special” AIFs (i.e., funds in which only professional and semi-professional investors can invest) to grant or restructure loans within the following framework:

  • A closed-end special AIF may invest up to 30% of its aggregate capital, both contributed and committed but not yet contributed (net of fees, cost and expenses to be borne by the investors) (“Net Fund Volume”).
  • No consumer loans are allowed.
  • A loan to a single borrower must not exceed 20% of the Net Fund Volume.

Special rules on loans to shareholders

Under § 285(3) KAGB, by derogation of the foregoing restrictions, the grant of loans of up to 50% of the Net Fund Volume is also permitted to companies in which the closed-end special AIF holds a participation (shareholder loans) if one of the following conditions is met:

  • The borrower is a company controlled by the AIF;
  • The loan is subordinated; or
  • The loans granted do not exceed double the acquisition cost of the equity participation held by the AIF

The 50% threshold may be exceeded for subordinated loans to majority-controlled or wholly-owned subsidiaries of the AIF. In all cases the loan terms must ensure that the loans can only be made to entities in which the borrower holds an equity participation and under the same conditions as set out above.

The exemption for shareholder loans is also available for open-end special funds.

Closed-end funds marketed for investment by the general public also are allowed to make shareholder loans, but only up to 30% of the Net Fund Volume. Moreover, unsubordinated loans granted to non-majority-owned companies must not exceed the acquisition price of the AIF’s equity participation.

Any AIFM that manages loan originating funds must adhere to additional organizational requirements for risk management. An AIFM must establish proper procedures for credit authorization, loan processing and dealing with “problem loans” as well as an early warning system for increased risk.


Germany has finally caught up and liberalized the origination of loans by AIFs. However, important restrictions need to be observed to ensure that this new freedom does not create undue risk and does not allow regulatory arbitrage.