Regulatory

Regulation of Alternative Investments – News and Background Knowledge for Institutional Investors

This category brings together current news, legislative developments and background articles on the regulation of alternative investments and real assets. The content is aimed at institutional investors, capital management companies, asset managers, insurers, pension funds, pension schemes and family offices that are directly affected by regulatory changes in their capital allocation or fund administration.

The regulation of alternative investments is not an abstract field of law – it directly determines which asset classes are accessible, how much capital must be held against an investment, which reporting and disclosure obligations apply, and how fund structures can be set up. For institutional investors in real assets, regulatory expertise is a competitive advantage in its own right.

The Regulatory Framework: Who Regulates Whom?

The regulation of alternative investments in Germany and Europe follows a two-part structure: on the one hand, there is product regulation – the rules for funds and their managers. On the other hand, there is investor regulation – the rules that restrict or enable institutional investors themselves in their capital allocation.

The most important product regulation frameworks for alternative investments and real assets are the AIFMD and its national implementation in the German Capital Investment Code, the ELTIF Regulation, as well as product-specific EU regulations for venture capital funds and social entrepreneurship funds. The most important investor regulation frameworks are Solvency II for insurers, the Investment Ordinance for pension funds and small insurers, IORP II for occupational pension institutions, CRD/CRR for credit institutions, as well as the Insurance Supervision Act and BaFin supervisory practice for all regulated investors in Germany.

Capital management companies are confronted with both worlds through their institutional clients: they must comply with product regulation – and at the same time understand the investor regulation of their investors in order to be able to offer suitable fund products and structures.

AIFMD 2.0 and the Fund Risk Limitation Act: The Biggest Reform Since 2013

The most important regulatory turning point of recent years for the regulation of alternative investments is AIFMD 2.0 – the first major revision of the Alternative Investment Fund Managers Directive since it came into force in 2013.

The AIFM Directive was modernised in March 2024 by AIFMD 2.0. Following the abandonment of the originally planned Fund Market Strengthening Act, national implementation in Germany is taking place through the Fund Risk Limitation Act. The Fund Risk Limitation Act, which transposes AIFMD 2.0 one-to-one into national law, largely entered into force on 16 April 2026. ImmoFokusBnpparibas

The key innovations of AIFMD 2.0 at a glance:

Lending by AIFs is the most important new regulatory area by volume. The authority to grant loans within the framework of collective portfolio management is being redefined in the German Capital Investment Code. Loan-originating AIFs – that is, funds that grant loans directly, such as private debt and direct lending funds – will for the first time receive an EU-wide harmonised legal framework. Strict leverage limits will apply in future to loan-originating AIFs: 175 percent for open-ended AIFs and 300 percent for closed-ended AIFs, calculated according to the commitment method. BnpparibasCushman & Wakefield

Liquidity management is being significantly tightened for open-ended funds. Open-ended funds will in future be required to use at least two suitable liquidity management tools in order to identify and manage risks at an early stage. The selection and application of these tools must be justified in writing and reviewed regularly – a professionalisation of liquidity management with significant operational consequences. Invesdor

Outsourcing and delegation are being subject to new requirements. AIFMs must demonstrate in greater detail that they retain control over outsourced functions and do not become mere letterbox entities. The new requirements concern in particular cross-border delegation structures between EU member states.

Supervisory reporting is being expanded. The improved Annex IV reporting under Article 24 enters into force with AIFMD 2.0; new ESMA reporting standards will follow by April 2027. For registered capital management companies, accounting and audit obligations are being expanded. EY

Harmonisation in the EU single market is the overarching objective. AIFMD 2.0 removes existing competitive disadvantages for German fund managers through EU-wide harmonisation of lending rules. The goal of one-to-one implementation is also intended to avoid additional national gold-plating and thus competitive disadvantages for German AIFMs compared with Luxembourg or Irish competitors. Cushman & Wakefield

KAGB and the Location Promotion Act: New Opportunities for Real Asset Funds

In addition to the implementation of AIFMD 2.0, the Location Promotion Act, which entered into force on 9 February 2026, brought independent and important changes to the German Capital Investment Code for real asset investors.

A central objective is the mobilisation of fund capital for the expansion of renewable energy and the financing of infrastructure. By introducing a separate definition of the management of renewable energy in the German Capital Investment Code, it becomes possible to qualify these as permissible assets for closed-ended domestic retail AIFs. In addition, AIFs in the form of real estate special funds may now invest up to 15 percent of fund assets in infrastructure project companies. Bnpparibas

As the codification of all German investment law, the German Capital Investment Code is the central national legal framework for all alternative investment funds in Germany – from real estate funds to infrastructure funds to private equity and private debt funds. It not only implements the AIFMD, but also regulates the national product types and defines BaFin’s supervisory practice vis-à-vis capital management companies.

ELTIF 2.0: The European Framework for Long-Term Investments in Real Assets

The European Long-Term Investment Fund is the EU vehicle specifically designed for long-term investments in infrastructure, real estate, private equity and private debt. The revised ELTIF 2.0 Regulation has been applicable since January 2024 and fundamentally overhauled the ELTIF, which had previously been little used.

The most important changes introduced by ELTIF 2.0 concern institutional and semi-professional investors: the investment catalogue has been significantly expanded, diversification requirements have been relaxed, master-feeder structures have been permitted, and distribution barriers for cross-border use within the EU have been reduced. ELTIF 2.0 therefore offers institutional investors for the first time a standardised vehicle for private markets strategies that can be distributed across the EU – without the complex structuring of national special fund formats.

ELTIFs may also be of particular interest to Solvency II investors, as in certain cases they benefit from favourable capital requirements. In appropriately structured ELTIFs, the Solvency II equity risk module can be reduced; under certain conditions, the long-term equity investment module can also be applied, which enables a further significant reduction in own funds requirements. Institutional-investment

Challenges remain: the operational handling of ELTIFs in Germany is complex, and not all investment strategies can easily be transferred into the ELTIF format. As a product, the ELTIF is not yet fully suited for mass use, as implementation remains complex. Nevertheless, ELTIF 2.0 is the most important new structuring option for institutional real asset investors with European distribution ambitions in years. Institutional-investment

Solvency II: Capital Requirements for Insurers in Alternative Investments

For insurance companies as institutional investors in real assets, Solvency II is the decisive regulatory framework – it defines how much capital must be held for each investment and therefore directly influences the attractiveness of individual asset classes.

The amended Solvency II Directive was published in the Official Journal of the European Union on 8 January 2025. The member states have two years for implementation; the new rules will apply by 30 January 2027 at the latest. The Property Post

For real asset investors, two changes are particularly relevant: first, the criteria for classification as a long-term equity investment are being relaxed. The criteria for long-term equity investment classifications have been loosened, especially for holdings in ELTIFs and AIFs with a lower risk profile. Insurers should analyse their equity investments in order to optimise capital requirements. The long-term equity investment stress factor of 22 percent instead of the regular equity risk module of 39 to 49 percent is a significant capital advantage for infrastructure and private equity investments. Second, the capital requirements for securitisations, especially for senior tranches, are being reduced, which is intended to encourage insurers to invest in this asset class. The Property PostBnpparibas

The practical significance is this: under the reformed Solvency II system, long-term investments in infrastructure, real estate and private equity are becoming more attractive for insurers from a regulatory perspective – a structural incentive that is likely to strengthen institutional allocation to real assets over the medium to long term.

Investment Ordinance: The Framework for Pension Funds and Small Insurers

The German Investment Ordinance is the central regulatory instrument for pension funds, funeral funds and small insurance companies that are not subject to the full Solvency II regime. It defines in which asset classes and within which limits these investors may allocate their capital.

The Investment Ordinance is relevant for alternative investments and real assets in several respects: it defines limits for real estate investments, participations, infrastructure assets and alternative investment funds. Changes to the Investment Ordinance – for example through its opening to new asset classes or the expansion of participation limits – have direct effects on the investment options of a broad group of institutional investors in the German market. At the same time, the interaction between the Investment Ordinance and ELTIF 2.0 is an active regulatory field of discussion: whether and how ELTIF investments are to be classified within existing Investment Ordinance limits has considerable consequences for the practical usability of the ELTIF format for this investor group.

Basel III/CRR III: Banks as Institutional Investors in Real Assets

Banks and savings banks are an important segment of the German market as institutional investors in special funds and account for around eleven percent of the assets of special funds. They are subject to the capital and liquidity requirements of the Basel framework, which is implemented at EU level through CRD and CRR.

With the entry into force of CRR III and CRD VI on 29 July 2024, the guidelines agreed under Basel III have been finally implemented in EU law. For banks as investors in real asset funds, banking supervisory law determines which risk weights must be applied to participations in infrastructure, real estate or private equity funds – and thus how much regulatory capital must be held for these investments. Ypog

The interaction between Basel capital requirements and institutional demand for alternative investments is a permanently relevant regulatory issue: higher risk weights for participations increase capital requirements and dampen willingness to invest; relief measures – as granted in some areas under CRR III – can open up new allocation room for banks in real assets.

Frequently Asked Questions on the Regulation of Alternative Investments

What is the AIFMD and why is it relevant for real asset investors? The AIFMD is the EU directive that regulates managers of alternative investment funds – that is, managers of hedge funds, private equity funds, real estate funds, infrastructure funds and private debt funds. It defines authorisation requirements, capital requirements for the AIFM, custody rules, reporting obligations and distribution rules. For institutional investors in real assets, the AIFMD is relevant because it determines the fund structures through which most alternative capital is invested.

What does AIFMD 2.0 specifically change for institutional investors? Institutional investors are primarily affected by AIFMD 2.0 on the limited partner side: their fund managers must implement new liquidity management tools, comply with expanded reporting requirements and observe new leverage limits for loan-originating funds. For investors, this means potentially changed fund structures, adjusted liquidity windows and more extensive regulatory reports from their fund managers. At the same time, the EU-wide harmonisation of lending creates a clearer framework for direct lending and private debt funds.

What is the German Capital Investment Code and how does it differ from the AIFMD? The German Capital Investment Code is the national German implementation of the AIFMD – and in some respects goes beyond its minimum requirements. The code regulates all German investment funds, defines permissible legal forms, investment conditions and reporting obligations, and creates the supervisory framework for BaFin regulation of capital management companies. For institutional investors, the German Capital Investment Code is the direct legal framework for their German fund investments.

Why is ELTIF 2.0 relevant for institutional real asset investors? ELTIF 2.0 creates for the first time a standardised vehicle that can be distributed across the EU for long-term investments in real assets – infrastructure, real estate, private equity and private debt. For institutional investors with cross-border mandates or for capital management companies with European distribution goals, the ELTIF replaces or supplements complex national fund structures. In addition, for insurers regulated under Solvency II, the ELTIF offers the advantage of possible classification as a long-term equity investment with a reduced capital stress factor of 22 instead of up to 49 percent.

What does Solvency II mean for investments in real assets? Solvency II prescribes how much capital insurance companies must hold as a risk buffer for each investment – defined through solvency capital requirements with different stress factors by asset class. For alternative investments and real assets, the long-term equity investment module is decisive: under certain conditions, it allows a significantly reduced capital requirement of 22 percent instead of the regular 39 to 49 percent for unlisted participations. The Solvency II reform of 2025/2027 expands and simplifies access to the long-term equity investment module, making long-term investments in infrastructure and private equity more attractive for insurers.

What is the Investment Ordinance and who does it affect? The Investment Ordinance is the German set of rules that regulates the capital allocation of pension funds, funeral funds and certain insurance companies – as a simplified regime below Solvency II. It defines investment limits, permissible asset classes and requirements for diversification. For institutional investors subject to the Investment Ordinance, the framework directly determines what proportion of their capital they may invest in real estate, infrastructure, private equity or private debt – and under which conditions these investments count towards the applicable limits.

What is the difference between product and investor regulation in the field of alternative investments? Product regulation affects funds and their managers: it defines how a fund may be structured, managed and distributed. Investor regulation affects institutional investors themselves: it defines how much capital an investor must hold for a particular investment and which asset classes are permissible at all. For institutional investors in real assets, both levels are relevant and must be taken into account simultaneously in investment decisions and fund selection.

This Area on ASSETPHYSICS

ASSETPHYSICS tracks regulatory developments in the field of alternative investments and real assets with a focus on institutional investors. The category includes news on legislative developments at EU and national level, analyses of BaFin communications and ESMA guidelines, assessments of AIFMD 2.0 and the Fund Risk Limitation Act, Solvency II reforms, changes to the German Capital Investment Code, ELTIF developments and Investment Ordinance updates. The specialist articles complement the daily news feed with analytical depth for institutional portfolio decision-makers, compliance officers and fund managers.