Magazine Issues » July-August 2021

Regulation: Germany's new impact fund regime

Alexander_VogtIn a broader government initiative to make Germany a more attractive domicile for investments funds, the German legislator has introduced a regime designed to promote the formation of development impact funds (Entwicklungsförderungsfonds, or EF-Funds), which will come into force on August 2, 2021.

EF-Funds represent a step change for German development impact managers and their ability to raise capital globally. The political force behind this initiative is matched by significant financial clout – Germany’s development assistance budget exceeds circa €10 billion per annum.

The uniquely flexible EF-Funds regime attempts to resolve and reconcile several key issues: Public-private partnerships (or blended finance structures) can be used to effectively leverage the impact of public development funding. German-domiciled funds are desirable, particularly from the perspective of political accountability, but German funds legislation has been restrictive, making the creation of development impact funds in Germany unfeasible.

By definition the new EF-Funds are distinct and separate from other fund types. Their key features are as follows:

Impact: The investment activities of EF-Funds must have a measurable positive impact on the attainment of at least one of the UN Sustainable Development Goals in developing countries. What is more, no investment made by EF-Funds may materially detract from the attainment of any of the UN sustainability goals.

Strategies: EF-Funds can invest flexibly across all asset classes, including debt, private equity, infrastructure as well as real estate, and can do so directly or indirectly via fund-of-funds strategies.

Investors: EF-Funds are German special AIFs (Spezial-AIF), i.e. they can only accept investments from professional and semi-professional investors.

Structuring flexibility: EF-Funds enjoy greater structuring flexibility that any other German fund type:

  • EF-Funds can be open-ended or closed-ended.
  • EF-Funds are not subject to any leverage restrictions. In particular for credit strategies this is a welcome change, since other credit funds are generally subject to leverage limitations.
  • EF-Funds benefit from a relaxation of the organisational requirements applicable to German AIFMs managing credit funds, thereby lowering the entry barrier for managers seeking to invest in private debt.
  • EF-Funds can issue guarantees. While the permissibility of guarantee transactions for other AIFs is questionable under German law, they are now expressly permitted for EF-Funds.
  • EF-Funds can issue notes as refinancing instruments, opening up the possibility to create structured investment funds under German law. What is more, unit/share classes can have different risk profiles and distribution entitlements...
  • Public sector involvement is not required: Although EF-Funds are well suited for blended finance, no public funding is required to benefit from the EF-Funds regime.

In its recently published Sustainable Finance Strategy, the German government has committed to pursuing climate and development goals through EF-Funds.

By Alexander Vogt, partner at Linklaters

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