New German Investment Ordinance passed: what has changed?
Limited applicability for some investors
A year has passed since the publication of the draft Ordinance on the Investment of Restricted Assets of Insurance Undertakings1 (AnlV) in May 2014. On 7 March 2015 the new AnlV entered into force – without any grandfathering provisions, except for existing private equity funds. Several critical risks contained in the draft AnlV were mitigated, and the new text is now more advantageous for investors (or at least preserves the status quo). The publication of the new AnlV will now allow insurers to better plan their new investments. This applies in particular to alternative investments, which have become more important given the fall in interest rates.
However, for those entities that will have to comply with Solvency II rules, the new AnlV will only be relevant until the beginning of 2016. For other institutional investors, such as Versorgungswerke and pension funds, the AnlV is here to stay.
Regrouping of fund categories
The new AnlV regroups funds and distinguishes between UCITS (No 15) and alternative investment funds (AIFs) (Nos 16 and 17), for example Other Investment Funds2 and special AIFs (Spezialfonds). The new AnlV further distinguishes between real estate funds (No 14c) and private equity funds (No 13b).
Section 2(1) No 15 AnlV covers investments in domestic and EU UCITS. The registered office of the UCITS management company must be within the EEA.
The previous special funds3 are covered by section 2(1) No 16 AnlV. These funds include all domestic open-ended special AIFs4 that are managed and established pursuant to s284 German Investment Code (Kapitalanlagegesetzbuch – KAGB) and whose managers hold a licence under section 20(1) KAGB; comparable EU investment undertakings with a regulated management company within the EEA are also eligible.
Even though the wording suggests that such special AIFs must "only" comply with the requirements of section 284 KAGB,5 it is currently under discussion and it is likely that BaFin will continue to impose the requirements already defined in BaFin circular 4/2011 (VA)6 for special funds to this No 16-fund category as well. This means unsecuritised loans would still be limited to 30% of the NAV for a No 16-Fund.
Section 2 (1) No 17 AnlV covers all other AIFs which are not covered by sections 2(1) No 13b (Private Equity Funds), 14c (Real Estate Funds), 15 or 16 of the new AnlV. This is good news, given that the draft AnlV had still provided for almost all funds to be covered by No 17 that were not, or were not managed like, UCITS. This would have resulted in a split-up of large special funds which are frequently structured as "Other Investment Funds", but this could be prevented. Pursuant to the reasoning of the new AnlV, 100% loan funds can be allocated to this No 17-Fund category.
However, the new interpretation of the BaFin's investment funds department regarding open-end Special AIF which can now restructure acquired loan receivables without using a fronting bank, will effectively lead to a limit on investment into loan receivables to 50% of the NAV of the open-end Special AIF.
Closed-end Special AIF may, however, still invest exclusively into loan receivables and can also originate loans, subject to certain requirements.
Real estate funds are covered by section 2(1) No 14c AnlV. This section covers domestic (open-ended or closed-ended) special AIFs as well as domestic closed-ended mutual AIFs (typically structured as a GmbH & Co Investmentkommanditgesellschaft, ie similar to an LLP-structure) which directly or indirectly invest in real estate and other assets which are acquirable for a traditional real estate fund. The domestic management company of these funds must hold a licence under section 20(1) KAGB. Comparable EU investment undertakings are eligible if their management company is supervised accordingly. BaFin is expected to generally maintain the existing rules on borrowing limits, though it would be advantageous if the limit was set at a uniform 60% of the fair market value of the (indirectly) managed real estate assets for all types of funds. In respect of open-ended real estate special AIFs, the BaFin is likely to continue to insist on the general redemption period of six months, which it derives from the general safety principle.
Section 2(1) No 13b AnlV covers domestic closed-ended AIFs which directly or indirectly invest in non-listed companies (ie typical private equity funds and infrastructure funds). Eligible investments also include equity-related and other instruments of corporate financing which may be advantageous in particular for tax reasons (for example shareholder loans). The management company of these funds must either be fully regulated or registered under section 44 KAGB. Funds and management companies with comparable rules may also be domiciled within the EEA or in a full member state of the OECD. Non-regulated Private Equity collective investment vehicles may be allocated to section 2(1) No 13a AnlV pursuant to the reasoning of the draft AnlV. However, as these types of funds sometimes do not meet the requirements for No 13a, it might be a better idea to consider a fund-of-funds structure, as the reasoning of the final AnlV clearly states that, for the target funds (eg an US PE-Fund) of such a structure, the requirements of No 13b must not be met as long as the fund-of-funds complies with No 13b requirements.
New alternatives quota
A new "alternatives quota" of 7.5% of the restricted assets is defined in the AnlV. This AI-Quota restricts (i) all directly and indirectly held investments under section 2(1) No 17 AnlV and (ii) all assets which are held in special AIFs under No 16 but cannot be allocated to section 2(1) AnlV, for example unsecured loans and precious metals.
The AI-Quota also comprises (iii) hedge fund and commodity risks. All assets allocated to the AI-Quota also account for the so-called "risk-quota" of 35% of the restricted assets. Interestingly, the reasoning of the AnlV mentions (and also the structure of the rules suggests) that if an investment is allocated to the AI-Quota, this will block other quotas, such as the ABS-Quota or the new HY-Loan-Quota of 5% which must be accounted for in other cases of indirect investments.
Infrastructure loans and high-yield corporate loans also eligible
Under section 2 (1) No 4c of the new AnlV, restricted assets may also include loans which do not meet the requirements of the credit guidelines and/or the requirements otherwise defined in the old AnlV, if the borrowers are domiciled within the EEA or in a full member state of the OECD and the loans are adequately collateralised by security in rem or under the law of obligations. According to the reasoning of the AnlV, a rating of at least B- (S&P, Fitch) is sufficient but also required (but may be replaced by equivalent internal assessments).
No 4c will in particular include infrastructure and renewable energy loans, as well as high-yield (senior secured) corporate loans. It had been difficult to acquire these types of loans and they required complex structures.
If one takes into account the progress made with regard to "loan originating funds" (for example in Ireland, Italy, Malta – but now also in Germany), this will open up a whole new area of activity for the asset management industry. The problems arising in practice (for example leverage limits) will probably be of a temporary nature only, at least in some jurisdictions.
All directly and indirectly held loans under No 4c are limited to 5% of the restricted assets (except where they are held via a No 17-fund that should only account for the AI-Quota, cf. above).
To some extent, the new AnlV conserves the status quo, for example with regard to special AIFs, and offers more flexibility for real estate and loans. On the other hand, it imposes some restrictions on investments in third-country private equity. Even if some details are subject to a revision of circular 4/2011 (which may or may not transpire), the new AnlV provides a good and reliable legal basis upon which to alleviate the difficult investment situation of investors who must comply with German insurance regulatory law.
1. Sonstige Sondervermögen.
2. Verordnung über die Anlage des gebundenen Vermögens von Versicherungsunternehmen.
3. Spezialsondervermögen pursuant to s91 German Investment Act.
4. The AnlV considers an AIF to be open if the shares/units can be redeemed at least annually.
5. This allows for much flexibility and would also allow a 100% loan fund – subject to the new interpretation of the BaFin's investment funds department regarding open-end Special AIF which can now restructure loan receivables.
6. (VA) – Guidance Notes on the Investment of Restricted Assets of Insurance Undertakings.