Fund industry: origination, restructuring and prolongation of loans by investment funds

BaFin amended its administrative practice on debt funds in a letter dated May 12, 2015. This makes it possible to grant loans for the account of such AIFs for which the KAGB provides no or almost no product specifications. Liberalization in this area is leading to new business opportunities for fund managers and investors, also in competition with traditional banks.

Legal challenges

From a legal perspective, the detailed requirements of BaFin must be observed in particular when structuring debt funds.

Capital management companies (KVG) and custodians that wish to launch or hold debt funds in custody may have to adapt their internal organization to the new product. These include, for example:

• ensuring professional suitability at the management level
• the establishment of a related risk management system in accordance with MaRisk
• The expansion of the compliance function together with the compliance manual
• Fund managers must ensure the necessary minimum liquidity of the fund, if applicable
• If individual process steps are outsourced, the outsourcing agreements must be documented in accordance with the regulatory requirements.

From an investor’s point of view, the new Investment Ordinance and the Solvency II regulations to be observed for the establishment of investments for insurers must also be taken into account at the fund level. Thus, it is becoming apparent that, in addition to the new rules of SolV II, the AnlV will in fact also remain relevant.

With regard to the granting of loans, appropriate model documents and processes must be drawn up, tracked and, in each individual case, concretized and, if necessary, negotiated.

Tax challenges

From a tax perspective, the selection of the fund vehicle and withholding taxes on interest income are of particular importance for debt funds.

As a rule, a fiscally transparent fund vehicle should be preferred from the investor’s point of view, regardless of whether a closed-end or open-end fund is chosen. In addition, consolidation according to HGB or IFRS as well as regulatory requirements on the part of the fund vehicle as well as on the part of the investor must be taken into account. Against this background, however, we also recommend a comparison with foreign fund structures as well as securitization vehicles.

KPMG Services

KPMG offers the structuring and implementation advice required for the implementation of debt funds from a single source with its cross-functional, well-coordinated Alternative Investments Solutions Team at the KVG level as well as at the fund and asset level. This ensures highly competent, efficient and pragmatic solution-oriented project processing.

Further crucial issues for the tax structuring of a debt fund are the optimization of withholding tax on interest income or the possibility of withholding tax credits at investor level, tax compliance and reporting requirements.

Furthermore, the VAT treatment of the fund management fee or outsourced management services must be taken into account.

Implementation together with Advisory

The topic of debt funds is of concern to investors as a whole, as well as to capital management companies and depositaries.

Essentially, there are four fields of action to fulfill the requirements for the administration and custody of debt funds:

Acquisition control / product design: Investment and marginal review must check debtors and maturity congruence when acquiring loans. It may make sense to provide for corresponding new product processes in order to ensure or check, among other things, mappability, data availability and legal aspects. It does not matter whether the loan is to be acquired or issued by a fund.

Risk assessment and risk management: Unsecuritized loans differ significantly from listed products such as bonds, particularly in terms of data availability and liquidability. In risk measurement, this circumstance must be taken into account accordingly and the methods adjusted where necessary. In order to assess credit risk, it is necessary to evaluate the creditworthiness of debtors and changes in this creditworthiness over time with sufficient accuracy. The same applies to the development of the level of the credit risk premium.

Keyword “credit department”: Due to the partial applicability of MaRisk, KVGs must create and permanently maintain structures similar to a bank’s credit department or, alternatively, align their outsourcing controlling accordingly.

Compliance: The compliance function must be adapted and expanded accordingly.