Regulation, licensing and registration

Principal regulatory bodies

What are the principal regulatory bodies that would have authority over a private equity fund and its manager in your jurisdiction, and what are the regulators’ audit and inspection rights and managers’ regulatory reporting requirements to investors or regulators?

The regulatory body in Germany is the Federal Financial Supervisory Authority (BaFin). The regulation of private equity funds in Germany is based on the AIFMD. The regulatory regime is therefore foremost a regulation of the manager and only indirectly a regulation of the fund itself. BaFin has inspection rights towards managers as well as the right to perform an audit. In addition, each fully licensed manager must itself have an auditor perform an audit on the manager’s regulatory compliance.

The regulatory reporting requirements are as follows.

Registered managers (AIFMD sub-threshold managers)

  • Reporting obligations to BaFin:
    • annual report of information pursuant Annex IV of delegated regulation (EU) 231/2013 (AIFMD Annex IV Reporting); and
  • reporting obligations to the German federal bank (Bundesbank):
    • monthly report regarding the composition of the fund’s assets and the adjustment of the fund’s assets as a result of revaluation; and
    • quarterly reporting of granted loans of each amount over €1 million.

Fully licensed managers

  • Reporting obligations to BaFin:
    • ad-hoc notifications in the case of material changes (eg, dismissal of a managing director or reduction of own funds);
    • annual financial statement of the manager; and
    • AIFMD Annex IV Reporting; and
  • reporting to Bundesbank:
    • same as registered managers (see above).

As for the regulatory reporting to investors, half-yearly and yearly reports are mandatory for fully licensed managers. For registered mana­gers, there is no regulatory investor reporting requirement; however, annual reports are required by German commercial law.

Governmental requirements

What are the governmental approval, licensing or registration requirements applicable to a private equity fund in your jurisdiction? Does it make a difference whether there are significant investment activities in your jurisdiction?

Regulation of private equity funds is primarily exercised through the regulation of the managers. It requires that the manager is either fully licensed or registered with BaFin under the KAGB.

Registered managers (AIFMD sub-threshold managers): registration process

Availability

The registration process is only available to certain small or medium-sized managers. The most important category of these small to medium-sized managers are known as sub-threshold managers under the AIFMD/KAGB. In practice, most German private equity fund mana­gers fall within this category.

Sub-threshold managers under the KAGB are managers with assets under management of not more than €100 million (in the case of leverage) or not more than €500 million (no leverage) and who only manage special alternative investment funds (special AIFs). Special AIFs are AIFs whose interests or shares may only be acquired according to the fund documents by professional investors or semi-professional investors (ie, non-retail funds). Besides the requirements mentioned above, special private equity AIFs managed by sub-threshold managers are in principle not regulated.

In interesting option for a sub-threshold manager in the small to mid-cap market segment is to get additionally registered under the EU EuVECA regime to benefit from an EU marketing passport.

Registration procedure

The registration procedure for sub-threshold managers is comparatively simple. It requires the submission of an informal registration request together with certain ‘corporate’ documents on the manager and the managed funds (such as the fund’s limited partnership agreement (LPA) and the manager’s articles of association). In addition to being a special AIF, the fund may not require the investors to additionally pay in capital beyond the investor’s original commitment.

The possible EuVECA registration is in line with the EuVECA requirements on the manager and the fund.

Ongoing issues

An advantage of the registration is that only few provisions of the KAGB apply to a registered-only manager, mainly the provisions on the registration requirements, ongoing reporting requirements and the general supervisory powers of BaFin. However, fund-specific requirements do not apply to registered-only managers and their funds. In particular, the depositary requirements and marketing requirements as well as the additional requirements of the KAGB for fully licensed managers do not apply.

On the downside, the registration restricts the manager to the type of funds and investors for which the registration was obtained (ie, only special AIFs and professional or semi-professional investors). Furthermore, a registered manager does not benefit from the EU marketing passport under the AIFMD. A registered manager can, however, opt in to become a fully licensed manager.

Fully licensed manager: licensing process

Availability

Fund managers who do not qualify for a registration or who opt out of a registration must apply for a full fund-management licence with BaFin under the KAGB. A full fund-management licence opens the door for a manager to market funds to retail investors as well as to the EU marketing passport under the AIFMD.

Licensing procedure

The licensing procedure is a fully fledged authorisation process with requirements equivalent to the requirements for granting permission under article 8 AIFMD. The licensing procedure checks requirements, such as sufficient initial capital or own funds, sufficiently good repute of the directors and shareholders, and organisational structure of the manager.

Ongoing issues

The licensing of the manager results in the manager being subject to the entirety of the KAGB. This means, in particular, the following:

  • the required appointment of a depositary for the funds;
  • access to setting up contractual funds;
  • adherence to the corporate governance rules for funds set up as investment corporations or investment limited partnerships (investment KGs);
  • adherence to the fund-related requirements of the KAGB;
  • adherence to the marketing rules of the KAGB;
  • access to the marketing passport under the AIFMD;
  • access to the managing passport under the AIFMD; and
  • adherence to the reporting requirements of the KAGB.
Registration of investment adviser

Is a private equity fund’s manager, or any of its officers, directors or control persons, required to register as an investment adviser in your jurisdiction?

The German regime requires the entity that is conducting the portfolio and risk management of a fund to have a licence as a fund manager under the KAGB/AIFMD. There is no separate registration as an investment adviser. If a separate entity is advising the fund manager, such entity might need a MiFID licence for investment advice.

Fund manager requirements

Are there any specific qualifications or other requirements imposed on a private equity fund’s manager, or any of its officers, directors or control persons, in your jurisdiction?

The regulatory requirements differ depending on whether the manager is fully licensed or a registered manager.

A registered manager does not have to meet any regulatory capital requirements or suitability requirements. It is sufficient for the mana­ger to meet the capital requirements under company law (eg, €25,000 for a German GmbH). In practice, though, BaFin prefers to see that a registered manager has sufficient substance to be able to manage the fund.

The possible EuVECA registration requirements are in line with the EuVECA requirements on the manager and the fund.

A fully licensed manager must hold at least €125,000 initial capital. In addition, the manager must have additional own funds if the value of the assets under management exceeds €250 million. The additional own funds amount to 0.02 per cent of the value of the investment assets under management that exceeds €250 million. This corresponds to €20,000 per €100 million. Regardless of these calculations, the manager must have own funds amounting to at least 25 per cent of the fixed overhead costs.

A fully licensed manager needs at least two managing directors. The managing directors must be reliable and professionally suitable. The professional suitability is regularly given if the managing director has held a managerial position with a fund manager for at least three years. BaFin assesses the professional suitability individually, however, so the suitability can also be proven with less relevant professional experience.

Political contributions

Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure of, political contributions by a private equity fund’s manager or investment adviser or their employees.

There are no such detailed rules or restrictions in Germany (other than the general criminal laws on bribery). This probably reflects the fact that investments of public pension plans and other governmental activities in private equity funds are still rather limited in Germany.

Use of intermediaries and lobbyist registration

Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure by a private equity fund’s manager or investment adviser of, the engagement of placement agents, lobbyists or other intermediaries in the marketing of the fund to public pension plans and other governmental entities. Describe any rules that require a fund’s investment adviser or its employees and agents to register as lobbyists in the marketing of the fund to public pension plans and governmental entities.

None. Where applicable, the disclosure requirements under MiFID II apply if intermediaries are used in the marketing of the fund interests. German law treats potential investors as the regulatory client of the MiFID intermediary. This results in the application of the MiFID rules of good conduct and cost-disclosures rules to the relationship between the intermediary and the potential investor.

Bank participation

Describe any legal or regulatory developments emerging from the recent global financial crisis that specifically affect banks with respect to investing in or sponsoring private equity funds.

As a consequence of the global financial crisis, credit institutions in the meaning of the Capital Requirements Regulation are prohibited from conducting guarantee and credit business with private equity funds. However, this prohibition only applies if the balance sheet total of the credit institution exceeds a certain threshold. Under the same conditions, credit institutions are also prohibited from conducting proprietary business.