FRiG follows StoFöG – double blow for German funds

The changes indicated by European law result in particular from the AIFMD-II, which is implemented almost one-to-one. This is welcome because it does not create any competitive disadvantages for German fund managers. The effects for and on credit funds are particularly noteworthy. Although they have been legally possible in Germany since 2016, they are practically irrelevant due to strict regulatory and tax requirements.

The StoFöG had already harmonized the tax law for credit funds and made it more competitive with other jurisdictions, such as Luxembourg, which had often been the first choice for private debt structures in the past. The rules are now also implemented precisely under supervisory law with the FRiG, which is why German credit funds are also subject to the same competitive conditions at this point. Previously, German credit funds were in a tight regulatory corset. Direct lending was reserved only for closed-end special AIFs under restrictive conditions. Therefore, the second purchase of loans was more widespread in Germany, as it was permissible for various AIFs. The FRiG extends direct lending to open-ended AIFs as well as retail AIFs. However, the investment limits of the respective AIF structure must be observed. In particular, they all have in common that lending to consumers and now also securitisation strategies remains prohibited.

The FRiG defines the granting of loans, the lending AIF and the leverage-financed AIF in the KAGB. Under AIFMD II, lending AIFs are no longer allowed to participate in originate-to-distribute strategies. This prohibits fund strategies in which loans are granted for the sole purpose of transferring these loans or risks to third parties. A loan transfer to third parties justified in an individual case has the consequence that the lending AIF must retain 5% of the nominal value of each loan as risk.

Other key components of the FRiG are the new requirements for liquidity management instruments (LMT): The central provision of Section 30a of the KAGB requires a KVG to select at least two suitable LMTs for each investment fund it manages. Only in the case of money market funds is an LMT sufficient. This is a novelty for special AIFs, while mutual funds "only" have to review their previous instruments with regard to the extended selection requirements. The permitted LMTs are derived from the list in the new Annex II A, points 2 to 8 of Directive 2009/65/EC for UCITS, and from the list in points 2 to 8 of Annex V to Directive 2011/61/EU for AIFs. Behind numbers 2 to 8 are the LMTs: redemption restrictions, extension of notice periods, redemption fee, swing pricing, dual pricing, anti-dilution fee and disbursement in kind.

In future, KVG will have to take into account the selected LMTs, taking into account the investment strategy, liquidity profile and redemption policy of the investment fund. To this end, the KVG must define and implement detailed strategies and procedures to activate and deactivate the selected LMTs. The selected LMTs must be included in the fund's investment terms and conditions or articles of association.

In addition, the FRiG implements other European law contents, such as on outsourcing, the redemption of shares, the distribution of goods and the spin-off of illiquid assets. In addition, aspects of permissible activities of an external capital management company are regulated and requirements for licence application procedures or time requirements for managing directors are mentioned.

Among the national amendments to the KAGB by the FRiG, the expanded product range is noteworthy: because Section 91 (3) KAGB is being abolished, open-ended real estate and infrastructure funds are growing to include the legal form of open-ended investment AGs, which, however, has so far been of little relevance in practice.

The situation is different with the closed-end special fund, which more and more initiators and investors are using due to its advantages over the closed-end investment KG. This fund structure has been available for special AIFs since the Fund Location Act came into force in 2021 and is now also to be available for closed-end retail AIFs. The aim is to create legal certainty so that ELTIFs can also be set up as a closed-end special fund in the future.

There are also further national changes to the special fund in connection with the termination of the administration and the right to refuse performance in the event of a lack of liquidity.

The FRiG is thus continuing what was started with the StoFöG at the beginning of 2026: Germany will be given the opportunity to act competitively with other fund locations at the supervisory level. The double pack of FRiG and StoFöG is therefore good news, especially for private market funds.