The Master-KVG – an attractive option post AIFMD
The Master-KVG in German Asset Management
In order to sell their expertise to German institutional and retail investors, non-German asset managers must find ways to operate in the German investment market. This has become much more difficult under the Alternative Investment Fund Manager Directive (AIFMD). An attractive option is to cooperate with a German Master-KVG.
A KVG is a German regulated capital management company (Kapitalverwaltungsgesellschaft – KVG), formerly known as Kapitalanlagegesellschaft – KAG and, typically, takes the role of the Alternative Investment Fund Manager (AIFM) or the fund manager under the Directive for the Undertakings in Collective Investments in Transferable Securities (UCITS Directive). Contrary to a regular KVG however, a Master-KVG (formerly known as Master-KAG) primarily offers administrative services such as reporting, controlling, accounting, performance measurement and comparison, etc.). The actual core functions of the KVG, namely the investment management function such as the portfolio management for the investment funds, however, are delegated to German and non-German investment managers. A two level hierarchy is thereby created, where the administrative functions are separate from the portfolio management. The following briefing will explain the relevance of Master-KVGs in the German asset management industry and summarise the most important commercial facts along with the relevant legal, regulatory and tax issues.
The Business Perspective
Before Master-KVGs could be established, fund management companies managed on their own the portfolios of their funds whereas asset managers were limited to directly managing the portfolios for their own retail and institutional clients. In 2003 the German legislation changed, which enabled the delegation of the portfolio management to third parties. This created a market niche that sought to be filled. Many KVGs developed a new business model by outsourcing their fund management or insourcing asset managers with their own funds and clients, which resulted in a decrease of interest in their self-managed funds. Nowadays most Master-KVGs have a focus on asset under administration mandates.
The Master-KVG sector is experiencing an increasing importance in the German asset management market. In 2013 the assets under administration totalled €600 to €650 billion in comparison to €132 billion in 20031. Within 10 years the assets under administration increased sixfold and there is further potential due to various advantages of a Master-KVG compared to a regular KVG.
From an institutional investor’s perspective, using a Master-KVG is a very efficient way to consolidate all or a large part of its investment. The investment strategy can be tailored to the institutional investor’s preferences, for example as a special alternative investment fund (special AIF / Spezial-AIF), which is a German peculiarity enabling mainly professional investors to invest in funds specially tailored to their needs and wishes and enabling regulated investors to get exposure to asset classes otherwise not eligible to them. The overall administration of the funds will be processed by the Master-KVG but the asset allocation and the portfolio management can be managed by a selected third party asset manager. Investors used to allocate their assets to different funds administrated by different KVGs which used their own depositary banks. Striving for more efficiency the depositary banks were, starting in the 1990s, replaced by a single global custodian. For even further efficiency, investors chose to combine their assets and invest in a single Master-KVG (which in turn delegates the portfolio management functions to third party asset manager(s)) rather than in many KVGs, thereby consolidating in particular reporting and administration duties.
Without the need for third party asset managers to obtain a licence as a KVG themselves, the cooperation with a Master-KVG gives such asset managers relatively easy access to the German investment market. There are two possibilities of such cooperation. A non-German asset manager can either function as an adviser under which the Master-KVG would remain a decision making authority as regards the portfolio decisions, or as a provider of portfolio management services for the Master-KVG in which case the Master-KVG would delegate its original collective portfolio management tasks to the third party asset manager and empower such third party of such authority. Some asset managers manage dozens of German funds without having their own KVG and thereby also avoid a permanent establishment in Germany for tax purposes. This is typically done in the form of a special AIF, but also as a public investment fund.
The main players in the German Master-KVG market are:
- Allianz Global Investors
- DEKA Investment GmbH
- Deutsche Asset & Wealth Management
- BNY Mellon Service KAG
- Helaba Invest
- HSBC INKA
- Metzler Asset Management GmbH
- Société Générale Securities Services
- Universal Investment
Market figures and market potential
With special AIFs2 administering a total of approx. €1.071 billion as of 31 December 2013, according to German Asset Managers Association (Bundesverband Investment und Asset Management e.V. - BVI), Master-KVGs have a large market share in Germany. Pursuant to the 2013 TELOS-Study3 approx. 65 percent of all special AIF (AIF) assets are managed by Master-KVGs which amount to approx. €650 billion at present. According to a rough estimation, an additional €100 billion of assets are still available to the Master-KVG market and might be transferred to Master-KVGs in the medium term.
With a significant growth in assets under administration and a large future potential, competition is increasing, especially because global custodians broaden their range of services and thereby become new competitors. Master-KVGs must be flexible and adapt their service portfolio as well as expand their focus on an international level in order to remain competitive. Examples of expanding the service portfolio are “Value Added Services” such as real time reporting, IFRS reporting, value-at-risk analysis, stress tests, transition management and transaction cost analysis.
The most recent challenge was the adaption to the new German Capital Investment Code (Kapitalanlagegesetzbuch – KAGB) which came into force in July 2013. The KAGB implements the AIFMD into German law and substitutes the former German Investment Act (Investmentgesetz – InvG). As a result, all client agreements had to be revised in accordance with the KAGB, and German management companies, including master management companies, also had to obtain the newly introduced status of a KVG. Especially the newly introduced information requirements of the KVG vis-à-vis professional investors necessitated many changes. The transition phase to adopt all changes in the KAGB was set until July 2014 and has expired by now.
For asset managers, the KAGB has brought new challenges and, conversely, business opportunities to Master-KVGs. Closed-ended alternative investment funds (AIFs) that were not regulated by the InvG and were merely subject to a prospectus requirement under the German Financial Assets Investment Act (Vermögensanlagengesetz – VermAnlG) are now comprised by the scope of the KAGB. This requires every manager of such AIF to either hold a license as an AIF-KVG or to team-up with a Master-KVG. The application for a license is an expensive and long lasting process and especially burdensome for managers of small and specialised AIFs. This makes the appointment of a Master-KVG an attractive alternative for managers of AIF now subject to the German investment fund regulation.
While approx. 9 Master-KVGs dominate the market, foreign asset managers seeking a Master-KVG will easily be able to find one that meets their particular needs at reasonable costs. Nevertheless it is often the investor who will want to influence the choice of the Master-KVG and the asset manager will then have to comply with this choice.
In the following we shall identify which contractual rules are required for the outsourcing of an AIF´s portfolio management from a regulatory or legal perspective and outline where there is room for negotiation. Where outsourcing is not an option, an advisory role might be considered.
The Legal Perspective
Managing German investment funds
Structure and investment process
When a German institutional investor assigns a mandate to an asset manager, during the RFP process the asset manager will usually be required to provide information on the German Master-KVG it intends to cooperate with, the designated depositary bank, and which pricing model will be used. In particular, institutional investors often have a previously chosen Master-KVG and depositary bank and will require the asset manager to pitch for a mandate with those specific participants.
There is a certain trend that institutional investors consolidate their assets in one fund to be administered by one Master-KVG. This fund will then often be split into several segments, each segment managed by a different asset manager.
An investor may occasionally also wish that the Master-KVG instructs one asset manager to manage one or more funds but appoints another manager with special expertise to perform e.g. the currency overlay management.
A Master-KVG can delegate the management of a whole fund, a segment of the fund, or merely certain functions4, such as transition management.
Liability within the delegation
Even though the Master-KVG is primarily a fund administration platform and the asset allocation and portfolio management is “delegated” to an asset manager, from a regulator’s perspective, the Master-KVG remains legally responsible for the portfolio management process.
Furthermore, when a Master-KVG manages a fund, it acts in its own name, but for the (joint) account of the investors. This means that the Master-KVG is liable for breaches of investment limitations and other errors and violations of investment regulation.
Due to this regulatory and legal frame, a Master-KVG will try to protect its interests by imposing liability on the asset manager and insisting on certain decision making, instruction and auditing rights in the Investment Management Agreement (see below).
Public investment funds versus special AIFs
The KAGB distinguishes between “public investment funds” and special AIFs.
The units of public investment funds may be acquired by an indefinite number of natural persons and legal entities, irrespective of whether the investors are retail, semi-professional or professional investors. There are different types of public investment funds a KVG may launch, in particular:
- “investment funds according to the UCITS Directive” (Investmentvermögen gemäß der OGAW-Richtlinie, Section 192 et seqq. KAGB)
- “mixed investment funds” (Gemischte Investmentvermögen, Section 218 et seq. KAGB), which can invest in “other investment funds” (see subsequent) and other “mixed investment funds” besides securities and derivatives
- “other investment funds” (Sonstige Investmentvermögen, Section 220 et seqq. KAGB), which are allowed to invest in the assets eligible for a mixed investment fund (see above) as well as in precious metals and non-securitised loans
- “funds of hedge funds (Dach-Hedgefonds, Section 225 et seqq. KAGB)
- “real estate investment funds” (Immobilien-Sondervermögen, Section 230 et seqq. KAGB)
- “closed-ended public AIFs” (Geschlossene inländische Publikums-AIF, Section 261 et seqq. KAGB), which are allowed to invest in inter alia private equity, PPP project companies as well as tangible assets such as real estate (including forest, Timberland and agricultural country), shipping, aviation, rail vehicles, facilities with regard to renewable energies, electric vehicles and containers
Units of special AIFs on the other hand may only be acquired by semi-professional or professional investors but not by retail investors.
The reporting and publication requirements on public investment funds and special AIFs differ widely. A special AIF for instance does not need to publish a prospectus and its fund rules do not need to be approved by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) but merely need to be submitted to BaFin.
The KVG may launch the following types of special AIFs:
- “general open-ended special AIFs” (allgemeine offene inländische Spezial-AIF, Section 282 and 283 KAGB) which are allowed to invest into all assets, the market value of which can be determined
- “open-ended special AIFs with determined fund rules” (offene inländische Spezial-AIF mit festen Anlagebedingungen, Section 284 KAGB) which are comparable with the former special funds (Spezialfonds) within the meaning of the InvG and are often used as investment by institutional investors such as insurance companies and pension funds because of accounting and tax advantages
- “closed-ended special AIFs” (geschlossene inländische Spezial-AIF, Section 285 et seqq.) whose eligible assets are the same as those of a general open-ended special AIF
The establishment of a German special AIF is a relatively simple process. In an agreement the KVG, the depositary bank and the investor agree that the investor will subscribe shares or units of the special AIF. Often, it is common understanding of the parties that the portfolio management of the special AIF will be delegated by the KVG to a third party asset manager chosen by the investor. The special AIF will be governed in accordance with the general and special fund rules which set forth the investment restrictions. In addition there will usually be investment guidelines issued to expand the existing restrictions. To give an example, the special fund rules permit an investment of up to 10 percent of the fund’s assets into unlisted equity. The investment guidelines on the other hand often state that unless specifically agreed with the investor and the KVG, no unlisted investments may be purchased or no further investments may be made into private equity.
It should be noted that tax requirements limiting the investment policy need to be observed to ensure the fund’s tax exemption. Thus, from a practical standpoint, the regulatory flexibility in terms of eligible assets and techniques cannot be fully utilised.
The following chart illustrates the roles and responsibilities of the parties involved5:
Click here to view chart.
From the asset manager´s perspective, the specific rules concerning the delegation of Master-KVG activities to asset managers and especially non-German asset managers as set out in Section 36 of the KAGB are of particular importance as these will regulate the permissibility, scope, restrictions and formal requirements of such delegation. In addition to Sec. 36 of the KAGB, there are provisions in secondary law (Commission Delegated Regulation (EU) No. 231/2013) stipulating further requirements and specifying the requirements of Section 36 of the KAGB. BaFin has also issued guidance to clarify a number of uncertainties that may have arisen from these provisions.
The following rules must be complied with, in particular when portfolio management activities are intended to be outsourced from the Master-KVG to a third party asset manager.
- The KVG has to justify the delegation structure as a whole, based on objective reasons. However, this is not a substantial hurdle since the optimisation of business functions and processes, cost saving, expertise of the delegate in administration or in specific markets or investments as well as access of the delegate to global trading capabilities are considered objective reasons.
- The delegation of portfolio management (and other) tasks to the asset manager must not result in the Master-KVG becoming a letter box firm. This means that sufficient investment management functions have to remain with the Master-KVG. In particular, this is a requirement under the AIFMD and article 82 of the Commission Delegated Regulation (EU) No 231/2013.
- Any delegation of asset management (or risk management) functions to the asset manager – as well as further sub-delegations by the asset manager to third parties – requires prior approval by BaFin. The same applies to material changes of the outsourcing arrangement.
- The delegation shall not in any way interfere with the effectiveness of the Master-KVG’s supervision; in particular it shall not interfere with the Master-KVG’s acting in the interests of its shareholders nor impair that the investment fund is managed in the interests of the shareholders.
- As a consequence, most Master-KVGs attempt to impose an obligation on asset managers to abide by the so-called “Rules of Conduct” issued by the German Association for Investment and Asset Management (BVI) which are viewed as an industry standard and the provisions of the German Regulation specifying the Conduct and Organisational Rules of the KAGB (Verordnung zur Konkretisierung der Verhaltensregeln und Organisationsregeln nach dem KAGB-KAVerOV) and of the Commission’s Delegated Regulation6. Under these rules, the execution of securities transactions is subject to clear principles which ensure settlement in line with market conditions and equal treatment of all investors. These principles may, for example, be different from the rules in the US with respect to order aggregation, pre-allocation or cross-trades.
- The portfolio management may only be delegated to an asset manager who is admitted to or registered for asset management and is subject to effective supervision.7 If the asset manager is domiciled in a third country, co-operation between BaFin and the respective competent third country authority must be ensured.
- The asset manager has to fulfil certain other requirements, e.g. with regard to the qualification and integrity of its management and employees, to adequate resources for the fulfilment of the delegated tasks or to its remuneration system, the latter in our experience deviating from the US rules. Furthermore, the asset manager who performs portfolio (and/or risk) management tasks must not be the depositary or sub-custodian of the fund or any other undertaking having potential conflicts of interests.
- The Master-KVG is – and has to be – fully liable for the service provider, i.e. the asset manager, vis-à-vis third parties, including the investors and the depositary.
- This means that a Master-KVG cannot limit its liability towards investors by delegating the portfolio management and will consequently impose a strict regulation on the asset manager. Several attempts of asset managers to limit their liability to gross negligence or to foreseeable damages have been unsuccessful (see below).
- A delegation may not hinder the Master-KVG from giving further instructions to the asset manager or from withdrawing such delegated responsibilities with immediate effect if it is considered necessary to preserve the interests of the investors. This means that Master-KVGs must contractually ensure that they can give instructions to their service providers (in the given case, the asset manager).
- Because of this rule, the Investment Management Agreement and the Operating Memorandum (see below) contain provisions pursuant to which the Master-KVG can, at any time, take over the management of the fund if this is necessary to protect the interests of the investors. It is customary however, to exclude the liability of the asset manager in these cases.
- Moreover, the Master-KVG must be capable of effectively supervising the delegated activities at any time and must examine the services provided by the delegate on a continuous basis. Master-KVGs must therefore include the outsourced areas in their internal monitoring and audit procedures. While this last requirement has to our knowledge never been a “show-stopper”, the internal audit departments of UK and US asset managers often feel uncomfortable with the idea of granting access to their internal audit reports. This is, however, an inevitable requirement. Some Master-KVGs agree to accept the SSAE 16 (formerly SAS 70) reports instead of an internal audit report but this is not the standard. The Master-KVG must also possess contractually agreed audit and inspection rights including unlimited access to the asset manager’s premises and files. However, it is possible to carve out any information that relates specifically to other clients.
- Some Master-KVGs wish to not only delegate the portfolio management but also the pertinent internal audit functions to the asset manager. This typically entails that the asset manager organises his internal audit function along the lines of the applicable German rules. This may cause further problems.
- The asset manager must meet a number of information duties towards the Master-KVG. This also relates to information on employee transactions.
- The delegation of any Master-KVG activity has to be mentioned in the prospectus of a public mutual fund. For special AIFs which are sold exclusively to institutional investors, no formal prospectus is required. Nonetheless, investors need to be informed on any delegation of investment management functions – including portfolio management functions.
- Note that any further delegation by the asset manager to third parties is subject to the same requirements. In particular, such sub-delegations require prior consent of the Master-KVG and need to be submitted to BaFin prior to becoming effective.
Investment Management Agreement
The Investment Management Agreement by which the Master-KVG delegates the portfolio management function to the asset manager will typically refer to the fund rules and the investment guidelines. It will also refer to fees in an appendix which will typically be charged to the fund as an external expense.
The BVI has released a standard Investment Management Agreement for Master-KVGs. However, every Master-KVG still has its own standard document and there are large differences between them (in particular in the operational part).
The Investment Management Agreement will not only address the appointment of the asset manager and its representations, but also the limits for any investment decisions, pre-investment obligations as well as numerous other duties of the asset manager permitting the Master-KVG to comply with its regulatory obligations despite the delegation.
The Master-KVG's questionnaire
Most Master-KVGs require the asset manager to complete a detailed questionnaire in which they provide full disclosure on the systems they use, their operational set-up, settlement details, etc. This questionnaire is used to determine whether an asset manager is suitable to manage a German fund or not.
The Operating Memorandum
The Operating Memorandum (”OM”) is of primary importance insofar as it regulates the day-to-day relationship between the Master-KVG, the asset manager, and the depositary bank. Among other things it contains provisions on:
- Trade and settlement instructions
- Margin processing
- Resolution of active and passive breaches of investment guidelines (liability of the asset manager for such breaches often proves to be a contentious point)
- Processing of corporate actions
- Reporting (SSAE 16 (formerly SAS 70) becoming market standard in Germany as well)
- Trading in “new financial instruments”
- Escalation procedures
Some OMs not only cover operational issues but also contain further provisions on liability, representations and warranties, etc. It is, however, recommended to transfer provisions other than those dealing with operational issues to the Investment Management Agreement.
As the OM forms an integral part of the Investment Management Agreement, its provisions should be approved by the legal & compliance department.
The BVI has released “Market Standards” in cooperation with SWIFT for the processing of trade and corporate action instructions. These Market Standards provide a step-by-step analysis of the procedures to be applied by KVGs, the asset manager, brokers and the depositary bank for settling a trade. They are not compulsory, but apparently more and more KVGs and brokers voluntarily abide by them8. Any asset manager wishing to use a Master-KVG would be well advised to take these Market Standards into account.
Keeping yourself informed
In the Investment Management Agreement, the asset manager represents and warrants that he is familiar with the applicable legal requirements for managing a German fund (including any BaFin Guidance in this respect) and undertakes to abide by these rules. Some asset managers find it difficult to stay informed about changes in an ever-changing regulatory environment. Norton Rose Fulbright is happy to assist in this respect, e.g. by providing a regulatory updater highlighting legally relevant changes.
As a basic principle, the asset manager will be liable towards the Master-KVG if their investment decisions breach the investment restrictions and the fund suffers damages. It is difficult to rely on the concept of contributory negligence of the Master-KVG and very often Master-KVGs refuse to limit the liability to direct and foreseeable damages.
Contentious points often are the liability of the asset manager in case of
- default of the broker through whom securities are bought
- passive breaches of investment limits
- non-compliance with risk limits
Each Master-KVG has its own standards, and liability is always a contentious point. However, there is a range of possibilities to mitigate liability.
In the course of the implementation of the AIFMD, the importance of risk management has been significantly upgraded. Indeed, it is now deemed to be of equal importance to the portfolio management function, both being the core investment management functions of the KVG. A Master-KVG is, in principle, obliged to maintain a permanent risk controlling function which is functionally and hierarchically separate from the operating units (including portfolio management). In addition, the Master-KVG must implement adequate risk management systems in order to appropriately identify, measure, manage and monitor all material risks relevant to each investment fund’s strategy and to which each fund is or may be exposed. It has to review the risk management systems with adequate frequency (at least once a year) and adapt them whenever necessary.
As a minimum requirement, the Master-KVG has to:
- implement an appropriate, documented and regularly updated due diligence process when investing on behalf of the investment fund, according to the investment strategy, the objectives and risk profile of the investment fund
- ensure that the risks associated with each investment position of the investment fund and their overall effect on the investment fund’s portfolio and risk profile can be properly identified, measured, managed and monitored on a continuous basis, including appropriate stress testing procedures
- ensure that the investment fund’s risk profile corresponds to the size, portfolio structure and investment strategies and objectives as laid down in the fund rules, prospectus and other sales documents
The Master-KVG has to set a maximum level of leverage which it may employ on behalf of each investment fund it manages as well as the extent of the right to reuse collateral or guarantee that could be granted under the leveraging arrangement. Further general requirements can be stipulated by the Federal Ministry of Finance or the BaFin.
Special requirements apply with regard to derivatives, which entail special and potentially higher risks. In order to manage the risks inherent in derivatives for instance, each Master-KVG must implement special risk management systems and procedures, which are adapted to the special risks of derivative investments. If a Master-KVG chooses to purchase only relatively “plain vanilla” derivatives, it may adopt a so-called “simplified” risk management approach to calculate the market risk. If it uses complex derivatives, such as speculative credit derivatives or total return swaps, a “qualified” risk management approach is required from the Master-KVG.
In any case, the Master-KVG will require the asset manager to assist in its risk management activities, for instance by providing price information, analysing complex derivatives or helping in the establishment of reference funds. It should be carefully analysed whether this might amount to a delegation of risk management functions to the asset manager as this can be of relevance for the qualification of the Master-KVG as letter-box entity and consequently for the permissibility of the delegation as such.
With more and more institutional investors making use of only one Master-KVG (and often also just one global custodian) for all of their assets, a very large number of portfolios have been transferred between KVGs. This development requires transition managers who have gained their expertise in the more mature US and UK asset management markets.
While the business models between transition managers vary, one can at least distinguish a number of groups acting as such:
- investment managers
- program traders and
- investment banks
Quite often, these transition managers act as delegates for the Master-KVG that will be on the receiving end of a transition. A Master-KVG will, for a limited period of time, instruct the transition manager to take over and implement all of the investment decisions taken on behalf of the fund. Even though the delegation is only temporary, transition management in this context needs to be regarded as outsourcing and therefore the transition management agreements need to fulfil the outsourcing requirements stated above.
In the event that several KVGs and multiple external asset managers are affected by a transition, all parties must ensure that the transition manager does not interfere with the portfolio management by the asset managers. At the same time it has to be ensured that all the contractual and liability aspects of using a transition manager are properly clarified.
From a commercial perspective, when a foreign asset manager receives a fund management mandate from an institutional investor and thus establishes a fund with a Master-KVG, the asset manager can rightfully consider the fund as “his” fund. Legally, however, the fund is managed by the Master-KVG, and the asset manager functions merely as a service provider.
A Master-KVG that terminates the Investment Management Agreement with the asset manager and appoints another manager may suffer from a loss of reputation. An institutional investor would probably withdraw his money from the fund if an unwanted manager were imposed by the Master-KVG.
Nevertheless, at least in the case of public investment funds established with a Master-KVG, it would be a sensible precaution to stipulate in a side letter to the Investment Management Agreement that the Master-KVG will, at the instruction of the asset manager, terminate its mandate and transfer the fund to another KVG, within the legal constraints and deadlines of the KAGB.
An important investor group using the Master-KVG concept are German insurers (Versicherer) and general pension schemes (Pensionskassen) and pension schemes for certain professions (Versorgungswerke). The asset management of these investors is regulated under the Investment Ordinance (Anlageverordnung). Therefore, these investors will request the asset manager to adhere to the specific criteria in the Investment Ordinance and will lay down such requirement in the investment management agreement.
It should be noted that investment funds are beneficial for these investors because they permit access to asset classes otherwise not available and also permit leverage when it comes to investments in real properties.
Value Added Tax (VAT)
For a long time it was unclear whether the investment management services rendered by a third-party asset manager to a KVG are subject to VAT or not. Nowadays, following several decisions from the European Court of Justice, no VAT is, in principle, due on the portfolio management services if they relate to investment funds within the meaning of the German Investment Tax Act (Investmentsteuergesetz – InvStG).
Foreign asset managers need to be sure that the German fund they manage as insourcer for a Master-KVG will be exempted from trade tax (Gewerbesteuer) and corporation tax (Körperschaftsteuer) because a tax burden at fund level would constitute a showstopper for most of the investors. This requires that the terms and conditions for the fund or written investment guidelines satisfy certain criteria laid down in section 1 para. 1b of the InvStG. Accordingly, in the Investment Management Agreement, the asset manager will be obliged to adhere to such criteria and restrictions. In essence, the following tax criteria need to be met:
- Regulation of the Fund Manager: In light of the use of a Master-KVG, this condition is easily fulfilled.
- Redemption or Listing: Investors must at least have an annual redemption right or the fund must be listed on an exchange (exchange traded fund).
- Objective: The objective of the fund must be the passive investment on behalf of investors, i.e. the fund has to abstain from carrying on a business or trade. By way of exception, carrying on a business is permitted for real-estate-owning entities.
- Risk-Diversification: The fund has to adhere to direct or indirect risk-diversification requiring, in general, more than three assets with a different investment risk profile.
- Eligible Assets: At least 90% of the fund’s NAV must be invested in (i) securities, (ii) money market instruments, (iii) derivatives, (iv) cash deposits with banks, (v) real properties, (vi) real property holding entities, (vii) assets closely related to real estate, (viii) fund units or fund shares, (ix) participations in public-private partnership entities, (x) precious metals, loan receivables and shares in corporations if, in each case, the value can be determined. The remainder 10% of the NAV may be invested in assets other than those referenced above.
- Unlisted Corporations: No more than 20% of the fund’s NAV may be invested in unlisted corporations other than those holding real estate.
- Affiliation: The fund must not hold 10% or more of the shares in a corporation other than an entity holding real estate, a vehicle for public-private partnerships or an entity focusing on renewables.
- Loan: A loan may only be raised short-term and no more than 30% of the fund’s NAV. Real estate funds may raise loans up to 50% of their NAV.
- Documentation: The above restrictions and limitations must be laid down in writing.
If a collective investment vehicle does not meet each of the above criteria, it will not qualify as an investment fund (Investmentfonds) but rather as an investment company (Investitionsgesellschaft) basically subject to taxation at general rates. In the event of a special AIF, an incorrect documentation or non-compliance with the criteria might invoke taxation at fund level with retroactive effect. Therefore, adhering to the above list of criteria is vital for asset managers.