German Fund Market Act: Evolutionary step or new milestone?

Mr Siebel, the Fund Market Act came into force in July 2021 and is considered by many to be an important milestone for improving competitiveness in the German fund industry. What is your view on this development? And what new innovations do you think will result from this development in terms of investment vehicles and asset classes?

Rudolf Siebel: The Fund Market Act allows some new investment vehicles and access to new asset classes. One example are open-ended infrastructure funds. These already existed in a similar form, but they were abolished again in 2013 when the German Capital Investment Code (Kapitalanlagegesetzbuch) came into force. Development Promotion Funds (Entwicklungsförderungsfonds) are intended to help finance development and climate projects. Both are niche products. Another innovation is that special alternative investment funds (AIF) can be now launched as closed-end vehicles. Most attention was given to the fact that institutional funds, so called Spezialfonds, with fixed investment restrictions for semi-professional and professional investors are now allowed to invest up to 20 percent of their capital in crypto assets. However, we are only at the early stages of this development. From our perspective, the Fund Market Act is more of an evolutionary step than a new milestone.

Let's start with open-ended infrastructure funds. As a fund association, you regularly talk to your members. How much interest do you think has grown in such funds?

It is important to know why open infrastructure funds in their previous form could not prevail. They were introduced in 2007, among other things to finance motorway expansion with private money. This goal ultimately was not reached. Today, however, the situation is quite different. As part of the move to energy transition, a lot of money must flow into climate-friendly infrastructure, such as wind and solar parks. In addition, the low interest rate environment, which has now lasted for over a decade, has led to a clear investment trend towards alternatives - among institutional and private investors. This could make infrastructure projects with steady cash flows an attractive investment alternative. In addition, purely private-sector infrastructure project companies are now also possible as investment objects. So infrastructure funds could well become a success story now.

In any case, BVI’s members are interested in open infrastructure funds. A working group is dealing with this topic. However, the regulations lean heavily on the existing rules for real estate investment funds and work with many references which leads to numerous questions. Ultimately there is still a lot to be clarified. We are in dialogue with the Federal Financial Supervisory Authority (BaFin) on this and are working together on solutions. I assume that the regulatory challenges can be clarified relatively quickly. In our opinion, challenges could arise more from the lack of supply of suitable projects: The demand for infrastructure funds is likely to be much greater than the supply.

And what is the interest in development funds and special AIFs as closed-end funds?

The concept of so called development promotion funds serves to enable development promotion vehicles previously only launched in Luxembourg to be launched in Germany as well. German promotional bank KfW will therefore certainly want to use this new vehicle. As far as closed-end special funds as special assets are concerned, the new regulation for the first time opens up the legal form of a special fund to German private equity funds and venture capital funds as an alternative to the previously customary GmbH & Co. KG (limited partnership). So far, however, we do not see this product being used on a larger scale.

What is the impact of the new possibility of investing in crypto assets?

From the BVI's point of view, it is important that fund companies can participate in this market if they want to. We therefore welcome the fact that Spezialfonds with fixed investment restrictions are now allowed to invest up to 20 percent of their value directly in crypto assets within the meaning of Section 1 (11) sentence 4 of the German Banking Act (KWG). We also welcome the fact that this possibility has been opened up to institutional investors, i.e. experienced investors, as a first step. Currently, BaFin only allows derivative certificates in retail funds that represent a crypto currency one-to-one. In the long term, however, we have to ask ourselves whether certificates are the most cost-effective way to access this market. We advocate that with the further growth of the crypto market, the topic of crypto assets in retail funds should also be put on the table.

Overall, we believe in the crypto market. We also think it is unlikely that big crypto currencies like Bitcoin or Ethereum will be hacked. The problem lies rather in the lack of regulatory security for those involved in the value chain. The German Securities Trading Act offers quite effective protection in the area of classic securities investments. This protection is still lacking in the crypto asset markets. It is therefore important that the entire crypto market is also more strongly regulated, analogous to the Securities Trading Act. By the way, our association member Universal Investment already offers an investment platform for digital assets across the entire investment process through UI Enlyte.

Another topic of the law is employee share ownership. Can you please explain this in more detail?

The aim is to promote start-up culture through opportunities for direct company participation and also, but not only, through funds. The challenge with such employee funds, however, is that not everyone can invest in their own company, as there are too few stock companies. The advantage of investing in a fund is that, for reasons of diversification, investments are not only made in your own company or industry. This becomes important if your own job is lost when the company goes bankrupt.

The aim of the Fund Market Act is to increase the competitiveness of the German fund industry and to reduce bureaucracy. In which areas do you think this has been achieved? Where is there need for improvement?

Overall, we consider the Fund Market Act to be a success, even if the new investment vehicles and new asset classes are still hopefuls in some cases. However, we do see one deficit. We would have liked to see the outsourced fund management to another ManCo (KVG) no longer understood as individual portfolio management, but as collective asset or fund management, as is the case in most other EU countries. The historically conditioned classification in Germany as individual portfolio management leads, among other things, to considerable bureaucracy due to double regulation and unnecessary information requirements.

All in all, I would say that Germany was already competitive as a fund domicile before, and the Fund Market Act will make it even more competitive. However, expectations should not be set too high.

_{¹ The German Fund Market Act (Fondsstandortgesetz)}

^{implements the amendments to Directives 2009/65/EC and 2011/61/EU and makes adjustments to the Transparency Regulation and the Taxonomy Regulation. In addition, further amendments are made to the German Investment Code (Kapitalanlagegesetzbuch - KAGB) to reduce bureaucracy and digitise supervision.}