After a long period of lobbying by the German private equity industry, new rules will come into effect in Germany this week that allow certain private debt funds to grant loans to German borrowers without needing a German banking license, reports PDI sister title Private Funds Management.
Germany has adopted a stricter approach to banking regulation than many of its western European peers, and the new rules are the first to allow private equity firms to grant domestic shareholder loans.
Currently many private debt funds in Germany use so-called ‘fronting banks’ to make loans – a common approach that is deemed legally compliant but inefficient and costly, as reported on pfm’s sister site Private Debt Investor last year. Under the new legislation, German and EU alternative investment fund managers and their respective funds do not need a banking license, as long as they are AIFMD compliant.
The new rules follow similar moves in Ireland, Malta and Italy and aim to provide a level playing field for German and non-German asset managers.
While the new rules have a clearly positive impact on private debt managers operating in Germany, there will be knock-on effects for private equity firms. This is because the new legislation introduces restrictions on the issuance of shareholders loans: a common form of financing for buyouts.
Under new rules, German buyout funds issuing shareholder loans to their portfolio companies will need to meet certain requirements, such as making sure that the fund has dedicated risk management and liquidity processes in place.
Prior to these rules being introduced, the German government introduced draft legislation placing further restrictions on shareholder loans. This meant that funds would only have been able to grant 30 percent of the fund volume on a 1-2-1 equity and shareholder loan basis.
Under the revision, funds are now allowed to grant up to 50 percent of the fund volume if the fund meets certain pre-conditions. These include: when the shareholder loan is granted to a subsidiary of the fund; when the loan is subordinated in a special form, which is typically the case in Germany; or if the loan is no more than twice the amount of the equity stake held by the fund in the borrower (calculated on a ratio of 1-2-2 equity to shareholder loan).
In addition, no limit will apply for subordinated shareholder loans if the fund itself does not borrow more than 30 percent of the fund commitments.
The new rules have a positive impact on non-German debt funds, such as EU debt funds which are allowed to passport to Germany. For example, Luxembourg or UK debt funds managed by a fully licenced AIF can now lend into Germany without needing a banking licence. For fund managers based outside of the European Union, the rules will only apply if they are fully AIFMD compliant.
However, the new rules are an additional restriction to German-domiciled funds, says Christian Schatz, funds partner at King & Wood Mallesons. “When you compare these [rules] with other member states in the EU, they do not apply such rules, but the German market will be able to deal with these generally” he adds.
The rules are expected to be introduced on 18 March.