Fund Risk Limitation Act and Location Promotion Act create new scope for infrastructure funds

As the federal government’s special infrastructure fund of 500 billion euros will probably not be enough to finance Germany’s roads, networks and the energy transition, the state is also relying on private funds.

Up to two trillion euros are to be mobilized. To this end, the German government wants to promote private investment, particularly in infrastructure and renewable energies as well as in smaller companies and start-ups.

In addition, two new laws are intended to create incentives: The Location Promotion Act and the Fund Risk Limitation Act.

On September 10, 2025, the Federal Cabinet approved the draft of the Act on the Promotion of Private Investment and the Financial Location (Location Promotion Act). This is intended to create a legally secure framework that will enable investment funds to invest in infrastructure and renewable energies on a larger scale. The equal treatment of fund investments with other capital investments under tax law is intended to remove previous obstacles and create confidence among institutional investors. This is intended to systematically increase the leverage effect of the 500 billion special fund through private funds. In addition, the Fund Risk Limitation Act is intended to modernize the regulatory framework for investment funds and, in particular, facilitate citizen participation and lending by funds. The Federal Ministry of Finance published the draft of the law on August 8, 2025.

Additional funds of EUR 1 to 2 trillion are expected from the private sector. At the very least, investment ratios in the past and funds currently available from selected institutional investors suggest these volumes.

A modular financing kit makes it easier to access capital

Infrastructure projects generally offer long maturities, indexed cash flows and low correlation to traditional markets. Investors also look for regulatory stability, transparent award procedures and reliable project partners.

In the life cycle of an infrastructure project, different financing vehicles can be recommended for the respective phases. Equity-like risk dominates in the early strategy development phase, whereas in stable operation it is more of a bond character. A modular financing toolkit that adapts to each phase makes it easier to access capital.

The aim of the Location Promotion Act is to align tax law with supervisory law so that all capital investments permitted under supervisory law are also deemed to be permissible assets under tax law and do not lead to a loss of status. At the same time, it is intended to ensure that all income from domestic sources of commercial income is subject to taxation at the level of the investment fund in order to avoid distortions of competition compared to regularly taxed companies. On the one hand, this should enable investment funds to invest in commercial projects in the area of infrastructure or renewable energies on a larger scale. On the other hand, equal treatment of investment funds and companies under tax law is to be achieved (so-called level playing field).

Planning and development phase

The planning and development phase is capital-intensive, but still without cash flow. Traditional equity capital, venture-style funds or development and promotional banks can step in here. A “project seed fund”, for example fed by the state’s special infrastructure fund and private venture capital, takes on feasibility studies, environmental impact assessments and securing land. Successful projects are later sold to construction or infrastructure funds; the seed fund thus realizes its upside, while risk-averse investors only get involved in one of the next rounds.

Set-up phase: More planning security for fund managers

Cost and schedule risks arise during construction. Banking consortia often structure construction loans, which are converted into long-term loans and credit lines after commissioning.

The new regulations of the Site Promotion Act create planning security for fund managers who want to get involved in the construction phase. The tax clarity and equality with companies remove barriers to investment. This paves the way for debt funds, mezzanine financing and insurance commitments, in particular by avoiding the loss of status.

Operating phase: Promotion of reinvestments

Once construction work is complete, investments generate steady cash flows. Pension funds, life insurers and mutual funds are predestined for this. Infrastructure bonds with a term of 20 to 40 years, possibly inflation-indexed, offer the desired asset-liability congruence. Rating agencies should develop standardized criteria to classify the creditworthiness of such bonds transparently.

A key concern of many fund managers is the possibility of reinvesting capital gains with tax relief. The Location Promotion Act provides for this. For example, the so-called roll-over rule is to be extended: The maximum amount for tax-neutral reinvestment is to rise from 500,000 to 2 million euros. The roll-over rule promotes reinvestment and prevents capital stagnation.

Partial or total sale

Private equity funds or strategic operators can acquire shares at this stage of the cycle in order to leverage operational efficiencies. A corresponding – possibly digital – trading venue would create secondary market liquidity and thus facilitate exit scenarios for early investors. This could be supported by the tokenization of infrastructure investments for appropriately established investor groups. At the same time, liquidity increases the attractiveness of the asset class as a whole.

The requirements for regulatory reporting and risk management planned as part of the Fund Risk Limitation Act can increase transparency for secondary market investors. This facilitates exit scenarios and can strengthen the liquidity of the asset class.

Dismantling, processing, repowering

Risks also arise at the end of the cycle: disposal costs, residual value uncertainties or reconstruction requirements. Specialized decommissioning bonds can provide a remedy. Insurers involved in decommissioning bonds calculate the dismantling obligation and provide the necessary funds in return for a premium payment.

Blended finance as a bridging solution

Public capital can have a catalytic effect by cushioning initial losses (“first loss”). A “blended finance pool” of federal funds, EU structural funds and philanthropic capital allows senior tranches to be sold to private investors, while junior tranches are held by the state. This can make infrastructure projects attractive to institutional investors and reduce the federal government’s capital requirements in the long term without projects failing to secure funding.

The planned Fund Risk Limitation Act is intended to strengthen liquidity risk management and lending by alternative investment funds. This would improve the structuring options for junior and mezzanine tranches, which are crucial for blended finance models.

Integrating retail investors

In addition to institutional investors, citizens should strengthen the capital base. Funds, certificates and bonds could enable investments from 100 euros, legally backed by regulatory approved sales prospectuses and information sheets. In addition, banks can offer green savings bonds, the funds of which flow exclusively into regional infrastructure. In addition, the current draft of the Fund Risk Limitation Act expressly provides for simplifications for so-called citizen participation funds, in which local citizens can participate in renewable energy projects via a regulated fund.

The Fund Risk Limitation Act and the Site Promotion Act should be flanked by additional measures

The proposed legislation mentioned above – the Fund Risk Limitation Act and the Site Promotion Act – should be supplemented by the following measures:

Digitization and data standardization

A central data platform could collect project data, ESG metrics and progress reports in machine-readable formats. Open APIs could give asset managers, FinTechs and rating agencies direct access.

Anchoring sustainability criteria

The German Federal Financial Supervisory Authority could award a “green eligibility score” in a fast-track review process if projects meet the standards of the EU Taxonomy and Disclosure Regulation. This would eliminate the uncertainty as to whether a bond would later be removed from ESG indices.

Formation of a pipeline

Federal, state and local authorities could feed their infrastructure projects into a rolling five-year portfolio in order to avoid capital lying idle and financial bottlenecks. A publicly accessible schedule offers investors predictability.

International co-investors

Foreign investors use European infrastructure as a diversification component. For very large projects, such as the expansion of a hydrogen network, consortium models could be developed with multilateral development banks.

Qualification of project sponsors

Not only capital, but also management expertise is in short supply. The federal government could establish an “Infrastructure Excellence Center” to support local authorities with funding applications, provide standard contracts and train project managers.

The mobilization of one trillion euros seems realistic

The Fund Risk Limitation Act facilitates private investment in infrastructure projects and is an important strategic tool for the asset management industry. The Location Promotion Act supplements the Fund Risk Limitation Act with tax measures that increase fund eligibility. Overall, it creates the conditions for new fund products that are also geared towards infrastructure projects – for both institutional and private investors.

The mobilization of one trillion euros of private capital therefore seems realistic. Even more is achievable if politicians and the financial sector make concerted use of the relevant instruments. It is crucial that each phase of the life cycle offers the right risk-return profile: Early-stage funds and guarantees in the planning phase, structured loans during construction, long-term bonds during operation and specialized decommissioning solutions at the end. Transparency, digital processes and ESG compliance form the backbone on which trust and willingness to invest grow.