PEGCC Comment Letter on proposed amendments to the German Investment Regulation (Anlageverordnung)
Dear Dr. Kerkloh:
On behalf of the Private Equity Growth Capital Council (PEGCC), I am writing this letter to you as a representative of the private equity industry in the United States of America to express our concerns at proposed amendments to the German Investment Regulation (Anlageverordnung) that could have a material adverse effect on our members who are located outside of the European Union (EU).
Our members are the world’s leading private equity and growth capital firms, representing a broad cross-section of the industry, including many small and medium-sized firms. Our members are united by their commitment to growing and strengthening the businesses in which they invest. Many of our members invest in Germany and market their funds to sophisticated professional investors in Germany, including German insurance companies and retirement schemes.
I understand that under proposed amendments to German Investment Regulation, German insurance companies and retirement schemes, which fall within the scope of this regulation or agreed to be bound by it, would face considerable uncertainty with respect to the funds in which they would be permitted to invest. Such uncertainty would make it significantly more difficult – and in some cases impossible – for these investors to continue to invest in funds managed by US private equity firms.
German insurers and retirement schemes are significant investors in US private equity funds. They invest in US private equity funds because of positive returns and portfolio diversification. An enforced shift in their investment strategy, imposed by new German regulation, would have a negative impact on the German insurance industry, German retirement schemes and their customers. In addition, this regulatory change would also deny US private equity funds an important source of capital.
As I understand it, the adoption of the proposed amendments would mean that German insurance companies and certain retirement schemes would only be able to invest with fund managers that are authorized pursuant to the Alternative Investment Fund Managers Directive (AIFMD) (at this stage and until the end of 2015, at the earliest, this is limited to EU-based fund managers). Other than this, only investments with fund managers that are subject to public supervision and that obtained an authorization equivalent to an AIFMD authorization would be permitted.
It is unclear whether any non-EU regulatory regime would fall within this category. The proposed amendments would effectively require German insurance companies and retirement schemes to make such a determination and to assume the risks associated therewith. This hurdle is likely to cause US private equity firms to be barred from the market and appears to violate the spirit of the decision to only introduce the non-EU-AIFM passport in 2015.
I note that all US managers of private equity funds generally have been required since 2012 to register with the US Securities and Exchange Commission as investment advisers. As such, those firms are subject to reporting obligations, substantive compliance rules (concerning, for example, books and records, personal securities trading and custody of client funds), antifraud rules, and periodic inspection by the SEC, all of which are intended to protect the clients (funds and their investors) of the fund adviser/manager.
The proposed amendments to the Investment Regulation, which would lead to a de facto discrimination against US private equity firms, could not be justified on objective grounds, would run counter to commitments made by G20 leaders to an open global economic system and could violate the principle of non-discriminatory treatment of US companies under the Treaty of Friendship, Commerce and Navigation between the United States of America and the Federal Republic of Germany dated October 29, 1954.
The proposed amendments to the German Investment Regulation presents important concerns for US private equity firms, German insurance companies, and German retirement schemes alike. They could seriously harm the interests of US private equity firms and their funds and the interests of German investors in those funds.
Given the significant negative effects of this proposal, the PEGCC respectfully requests that the German Federal Ministry of Finance takes into account these concerns to ensure that the proposed amendments to the German Investment Regulation do not effectively ban German insurance companies and retirement schemes from investing in private equity funds managed by US private equity firms or their affiliates. German insurance companies and retirement schemes should to retain full flexibility in choosing between investments with US or EU private equity firm.
The PEGCC and its members fully support well-tailored legislation that provides investors with appropriate protection and that delivers stability to the financial system. The proposed amendment to the German Investment Regulation is an important piece of the AIFMD implementation process which requires the German Federal Ministry of Finance to strike a delicate balance.
I appreciate the opportunity to express our concerns in connection therewith, and would be pleased to answer any questions you might have regarding this topic.
President and CEO
Private Equity Growth Capital Council