A recently-introduced German initiative to make that country a more attractive domicile for investment funds through a new regime promoting the formation of development impact funds should not pose a challenge to Luxembourg’s fund industry, has argued Maren Stadler-Tjan, investment funds partner at Clifford Chance Luxembourg.
The significant German move had raised concerns in some quarters that it could have made things more complex for Luxembourg fund distribution to professional and semi-professional investors on the other side of the Moselle.
A step change
The “Entwicklungsförderungsfonds”, or “EF-Funds” represent a step change for German development impact managers and their ability to raise capital globally”, wrote Alexander Vogt, a Linklaters partner, in a recent edition of Funds Europe.
The EF-Funds regime remedies the effect of German funds legislation, which made the creation of development impact funds in Germany previously unfeasible. Notably, the regime makes it possible for public-private partnerships (or blended finance structures) to be used in order to effectively leverage the impact of public development funding. EF-Funds can also issue guarantees, which German law does not clearly permit for AIFs. Such funds enjoy greater structuring flexibility that any other German fund type.
Despite this German development, Ms Stadler-Tjan of Clifford Chance did not see it as significant for Luxembourg. “At the moment, we don’t believe that the introduction of the German Entwicklungsförderungsfonds into German law will have an impact on the Luxembourg funds market, which already provides for the possibility to launch attractive funds products following an impact strategy and is known by the international investor base,” wrote Ms Stadler-Tjan in response to our questions.
Disclosure obligation
She pointed out that “Since the application date of the Disclosure Regulation, those funds, or more specifically their fund managers, are now obliged to disclose which sustainable investment objective such funds follow, to allow investors to take a determined investment decision before investing in such type of fund.”
Under the new German funds law, new EF-Funds may be set up as open-ended or closed ended Alternative Investment funds, referred to as Special Alternative Investment Funds, with the ability to invest directly or indirectly in all asset classes with no leverage restrictions. The funds are seen in general as impact funds and must have a measurable impact on compliance with the UN Sustainable Development goals in emerging markets.
Such funds must comply with certain risk and organisational requirements, such as the IFC World Bank Impact Principles. Their compliance with their intended sustainability goals must be audited on an annual basis.