Co-determination of investors in special funds in danger?

BaFin Consultation 08/2025 - Draft Fact Sheet [...]/2025

Investors in special funds are characterized by a high degree of expertise and a level of information. It is possible to integrate this in-depth expertise into the fund's own subscribed products strategy, but it is subject to certain limits in its specific design. The result is an industry practice in which a well-rehearsed interrelationship between (semi-) professional investors and the capital management company takes place. And on the basis of this long-developed practice, special funds were managed in a very efficient way in Germany. The draft of the BaFin leaflet on the influence of investors on investments and divestments of investment funds provides an opportunity to sharpen the understanding of the traditional role play with a long history of (semi-) professional investors and capital management companies.

Investor participation as participation questioned by the BaFin leaflet on investor influence in investment funds?

Investor participation sounds like a core element of democratic participation. And indeed, parallels can be drawn between the citizens in the Greek city-state of Athens, who were striving for political co-determination in the 5th century BC, and the (semi-) professional investors ("investors") of special funds, who were also striving for influence in fund policy: In the ancient Athenian ecclesia, the most important assembly organ of the citizens, citizens had the right to participate in decisions that affected the community: Topics such as war and peace and political measures. Transferred to the special fund, the investors' central co-determination rights also affect directly relevant decisions relating to their special fund, such as the acquisition and sale of assets (transactions), fund liquidation and also questions of distribution policy. The meeting organ of investors in special funds corresponding to the Ekklesia could confidently be called the Investment Committee. And so not only was the Ekklesia in Athens an exclusive gathering for adult Athenian citizens, but just as today, only investors in a special fund are entitled or entitled to vote in the investment committee who, like the citizens of Athens, qualify for it through influence: usually by the size of their capital share in the special fund. The central point is just as the citizens in the ekklesia had central co-determination rights that enabled them to influence the decisions of their community, so the principle of special funds is also based on the idea of co-determination and the active participation of the investor group in relation to the capital management company ("KVG") managing the special fund.

Ancient Athens has gradually perished due to military defeats and conquests in the course of history. Is the investors' right of co-determination vis-à-vis KVG and the Investment Committee threatened with a similar fate? The starting point for this concern could be BaFin's draft leaflet on the scope of the permissible influence of investors in investment funds under supervisory law (GZ: FR 1903/00063#00001).

What is it about?

The leaflet is intended to clarify whether and to what extent investors in an investment fund may influence investment decisions of KVG on behalf of the investment fund. The subject matter of the leaflet is to refer to “investments” and “divestments”. In essence, the supervisory authority demands that the final supervisory decision regarding the disposition of assets remains with the KVG (if portfolio management has not been outsourced to another party)
This is also logical, since in the construct of the (special) fund, the KVG is subject to regulation. It follows that BaFin monitors compliance with the legal requirements on the part of the KVG; therefore, in terms of supervisory law, decisions must also be made exclusively by the KVG. If BaFin determines that the KVG violates certain regulations or that there are risks, it can only take appropriate administrative measures against the KVG in the first instance. In short, a clear allocation of decision-making responsibility is required so that the decisions of the KVG, as a regulated entity, are subject to control by the BaFin administration at all times. In practice, KVG therefore regularly documents the final decision in a separate process, which culminates, for example, in a decision by an (investment) committee.

The KVG's power of final decision therefore conflicts with instructions from investors with regard to the acquisition of individual assets. This also applies to non-direct instructions in the form of veto rights, as this means that investors block the KVG's decision to acquire or sell an asset by refusing their consent (veto). On the other hand, “investment ideas” or “recommendations” of investors should not collide with the final decision, as the KVG's power to make the final decision is not called into question in this respect.

What could be the problems?

Up to this point, it should be noted that the draft leaflet seems to be dogmatically largely in conformity with the previous industry practice of special investment funds. It is sometimes customary, and the fact sheet would not object to this, for investors to be allowed to make recommendations before implementing relevant decisions, in particular those relating to the purchase or sale of assets.

However, the leaflet has put additional new practical aspects up for consultation, which would relate in particular to the fact-based implementation as well as to the documentation of this implementation. What would now be new would be to examine more critically whether in the individual case these are actually permissible recommendations or even – inadmissible – instructions to the capital management company. This study should be based on quantitative characteristics if the initiative to acquire new assets rarely or never comes from the capital management company itself, but essentially and continuously from the investors. Indications of such inadmissible indirect instructions are said to be:

( ... ) if the portfolio manager executes all investor recommendations one-to-one without his own research or material assessment of the opportunities and risks of the investment or divestment and formally limits his review to acquisition criteria or an investment limit check

It is not known whether there were practical failures in the industry that would have caused the consultation on the leaflet to be carried out. However, the introduction of such a quantitative model would break with industry practice. Typically, voting members in investment committees in particular are allowed to make a recommendation on any transaction, conversely this corresponds to their right to have their economic interests taken into account. This is widespread in specific asset classes, such as real estate. Depending on the interpretation of this restriction, the KVG could be required to refrain from communicating with investors again and again in individual transactions. The implications must be borne in mind if one takes as an example an individual investor real estate special fund, in which, for example, real estate with a three-digit million euro value is purchased. Typically, the investor then has real estate expertise himself. And he has typically organised his own individual fund – merely – as a component of his overall real estate investment and is also required under insurance supervisory law to closely monitor the investments of his fund. It is a balanced check-and-balance relationship between investors and KVG. Quantitative characteristics de facto undermine the co-determination rights of special fund investors and collide with their own insurance supervisory requirements. Empirical reasons for this seem unknown, at least they are not explicitly named. In any case, this would not comply with the requirements of the German legal trusteeship :

The supervisory requirement of third-party management, which necessitates the final decision of the KVG, does not mean that the investors' wishes may be disregarded.
With the acquisition of the shares in the fund, the investor is an investor in relation to the supervisory level, must in this respect respect respect the final decision of the KVG in his function and may therefore not be authorised to give instructions to it.
In addition, however, the conclusion of the fund contract creates a fiduciary relationship with regard to the civil law level. The legal trust is a specific German legal construct. It is anchored in German law and describes a special legal relationship: the trustee acts on behalf of and in the interest of the settlor in order to manage certain assets. This concept is established in asset management, and therefore also applies independently in the context of regulatory collective asset management.

It follows from this, regardless of whether the investment fund is a special fund or an investment fund in the form of a company: The legal obligation of the KVG as trustee or managing agent is to carry out the management in the interest of the investors, which must always be given priority over all other interests. Although at first sight there appears to be a conflict between the prudential and civil levels, they are in fact two complementary areas of regulation covering different aspects. Compliance with both levels does not give rise to any actual conflicts, since the respective provisions pursue different objectives. The primacy of the investor's interest is therefore limited by the lawfulness of the action under supervisory law. The KVG would not be allowed to implement investors' investment ideas if they violate the law. In the end, the KVG would therefore have to disregard such a recommendation from investors, which is quite rightly not objectionable. However, the priority of investor interest does not find its limit in content, i.e. profitability. This is where the principles of the legal trust come into play. With regard to the economic aspects of a transaction, it follows that KVG would undoubtedly act unlawfully or refrain from following the interest expressed by investors in the context of a recommendation to conclude or not to conclude a transaction. The supervisory responsibility of the KVG supersedes or supplements the interests of the investors only to the extent that the KVG must ensure that:

the different interests of two or more investors are weighed against each other,
the transaction is lawful,
the content parameters of the transaction are sufficiently transparent for investors,
the transaction is carried out properly.

Otherwise, the KVG would not only violate the legal framework of fiduciary and business management applicable in Germany, which is not overridden by supervisory law in this respect, but would also expose itself to unmistakable liability risks, as investors could rightly assert that their interests have been violated. In order to fathom investor interest, it is therefore practically essential to communicate with investors and document it through recommendations. The intensity of involvement varies greatly, whereby its determination can result from the fund contract and, if applicable, these attached rules of procedure to the Investment Committee. The BaFin Fact Sheet discusses even more extensive documentation obligations in the exercise of influence by investors. The motive is to raise awareness of the problem of investor influence on investment and divestment. This is expected to create an inhibition threshold for undue influence. As described above, however, the exercise of the rights under the trust does not result in any inadmissible influence with regard to which an awareness of the problem would have to be sharpened. Rather, the question arises as to whether this does not even discredit and stigmatize the exercise of an original right of investors. Increased documentation requirements would also lead to legal uncertainty and would contradict the overarching goal of reducing bureaucracy.

Empirical relevance

Investors differ – as do the asset classes in which investments are made. Accordingly, the communication behaviour of investors towards the capital management company (“KVG”) also varies. While some of these investors only comment on investment ideas to a limited extent, others communicate with KVG much more frequently and intensively in terms of content. The co-determination rights of investors in real assets funds are particularly affected. Portfolio transactions occur far less frequently with these funds than with securities funds and are then naturally very capital-intensive, which leads to increased relevance to coordination with KVG. The frequency and depth of the exchange can be typified and assigned to specific investor groups:

Investor type: Investors regulated by insurance regulators tend to communicate their interests clearly, which on the one hand certainly has to do with the size of their own capital investment and the associated expertise of their own. On the other hand, this communication approach can already be seen as a consequence of a regulatory obligation to monitor investments. Typically, the larger the capital share held by the investor in the special fund, the more intensive the communication with the capital management company. This staggered relationship between capital allocation and communication intensity begins with classic distribution multi-investor funds with comparatively limited integration into the fund strategy. However, there are differences here, for example, in the case of special real estate funds, investor involvement is also provided for in classic distribution multi-investor funds , which can be limited to the transaction of real estate, but in some cases can also include the cost triggering of due diligence and debt financing. Here, even in the case of multi-investor funds, the KVG's original plans to keep investor participation rather small can be thrown overboard if the first seed investors are representatives of larger investments and contribute their clear ideas to the fund design. In the case of club funds with larger holdings , the exchange intensifies noticeably. It is not uncommon for these to be single-asset funds in which investors are involved earlier and more intensively with regard to the asset to be acquired than, for example, in a blind pool strategy of a classic distribution multi-investor fund. If, therefore, there are at least two or more investors in a club fund or multi-investor fund who do not pursue a uniform interest from the outset – for example because they are affiliated companies – the KVG must ensure that transactions are always carried out in the interest of all investors. Therefore, KVG should not, for example, follow the recommendation of just one investor without first checking whether it is economically suitable for the investment fund or whether the other investors have the same interest in the transaction as the investor who expressed the investment idea. Typically, the manifestation of interest is organised via rules of procedure of the Investment Committee. The highest communication density is typically observed in individual investor funds when the sole investor holds all the shares in the special fund. Sometimes this individual investor fund is intended to represent the extended workbench in the investor's capital investment. In this case, the special fund has only one investor, and if the investor clearly expresses his interest in a transaction within the framework of a recommendation or if he waives this transparency in a documented manner and the transaction is lawful, the KVG must execute this transaction. In this respect, the conceptual difficulties of the draft leaflet are particularly evident in the case of individual investor funds: it would really not be apparent why this single investor would not be allowed to influence the decision of the KVG even without formal outsourcing, who in the event of formal outsourcing – i.e. in the event of formal outsourcing – i.e. simply by adding a contract – could also make decisions himself and even without the KVG's right of final decision.
Governance Type: The design of communication between investors and KVG is also influenced by different market and business practices. For example, German special funds as well as fund structures launched abroad but specifically designed for investors from the DACH region (e.g. in Luxembourg) typically pursue a non-discretionary approach. This means that the trust requires the involvement of investors in a way that is not known in pure supervisory law. In addition, however, there are also discretionary fund approaches in the special fund sector, which can be attributed to various reasons. In any case, in these cases, the AIFM, which is not subject to German supervision anyway, can continue to make decisions independently and flexibly within the framework of the agreed investment policy. For example, in the case of Anglo-American funds, a more active involvement of investors is far less common. This is probably mainly due to the fact that the supervisory relationship between investors and AIFM is usually not supplemented by a civil law trust, because it is a specifically German-dogmatic legal construct. And in turn, the different asset classes also play a role: infrastructure and especially private equity investments are typically organized more discretionarily between AIFMs and investors. This is probably due to the fact that the in-house competence to examine each individual transaction is not always available at each individual investor address to an extent that would make it seem sensible to involve them more intensively in the development and discussion of investment ideas. Typically, the focus of investors is then all the more on the initial manager due diligence as part of the product selection (“track record”). Certainly, the case is quite different with real estate as an asset class; typically, many investors in special funds have a well-founded opinion and extensive expertise in this regard. Here, too, there are differences as to which side of the balance sheet the special fund is active on: if it is real estate equity structures, the special funds tend to be set up in a non-discretionary manner, but if they are real estate debt structures, KVG usually manages the special fund more discretionarily.