in the US and Luxembourg), until 2016 there was no legal framework for German AIFs to grant loans by AIF. Rather, this was only allowed for banks as lending business (Kreditgeschäft) and subject to a licence under the German Banking Act (Kreditwesengesetz – “KWG“). Therefore, for a long time, AIFs had to cooperate with a fronting bank which granted loans using its existing licence from the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – “BaFin“) and subsequently assigned the claims arising from the granted loans to the AIF.
By mid-2015, BaFin had already abandoned its previous administrative practice, according to which loan origination by AIFs was generally prohibited. The legal framework followed somewhat later. With the implementation of Directive 2014/91/EU (UCITS Directive), the German legislator made it possible under the German Capital Investment Code (Kapitalanlagegesetzbuch – “KAGB“) in 2016, for certain AIFs to grant loans directly to companies, without the need for a banking licence. This regulatory shift was largely based on the fact that AIFs can play an important role, especially in times of a crisis, in the financing of companies that for various reasons (including a lack of profits or lack of collateral) are ineligible to receive regular bank loans…. almost as if Covid-19 had been foreseen.
Regulatory requirements for debt funds
Lending by debt funds is not completely unregulated. The KAGB imposes certain requirements on each of the AIF, its investors, its management company (Kapitalverwaltungsgesellschaft – “KVG” or “AIFM“) and on the loans to be granted.
Requirements for AIF / its investors
In principle, loans may only be granted by Special AIF (respectively via its AIFM for the AIF’s account), i.e. AIFs in which only
Requirements for AIFM
AIFM managing special AIF and granting loans on the AIF’s account must comply with further requirements. This is the case irrespective of whether the AIFM is “full-scope”, holding a licence with BaFin, or a “small” AIFM which are only registered with BaFin and in principle are subject to a very limited regulatory regime (De Minimis AIFM). The following requirements apply to De Minimis special AIFM only where they grant loans for the account of the special AIF they are managing:
Requirements for loans
The regulatory requirements for the loans granted depend on whether they are to be granted to third parties (Dritte) or to companies in which the special AIF has invested (“Shareholder Loans“).
For loans to third parties:
For shareholder Loans:
Insofar as Shareholder Loans are to be granted in addition to loans to third parties, the following shall apply:
Advantages of debt funds over banks
In particular for De Minimis special AIFM, only certain organisational and documentation requirements must be complied with in addition to the otherwise straightforward regulation. Even if they are obliged to classify the risks associated with loans, they can also become active where banks might usually say “No, thanks.”.
The current crisis is a particular illustration of the importance of flexible financing outside the tight regulatory corset applicable to banks. However, even after the Coronavirus, debt funds are likely to become increasingly suitable for raising capital, in particular for young companies, as they do not lose voting rights to the AIF as the AIF does not hold an equity participation in them, but nevertheless receive (indirectly) capital from investors who are interested to support young companies.
It is not to be expected, however, that lending by banks will become completely obsolete. Banks can offer – in ordinary times – more favourable conditions, especially when it comes to established companies. Therefore, banks and debt funds will probably jointly satisfy capital needs in the future, although with quite different target groups.