Lending to Germany-based companies has typically been hindered by the requirement of fund managers to hold a banking licence. However, following a prolonged period of lobbying from the German private capital industry, new rules enacted at the end of March will finally allow certain private debt funds to grant loans to German borrowers without the need for a banking licence. As such, the private debt fundraising space in Germany is yet small: Preqin’s Private Debt Online contains details for only 15 Germany-based private debt funds closed since 2000, raising €2.8bn collectively.
Germany’s strict approach towards banking regulation has led to a much smaller alternative lending market in the region. Germany-based firms represent only 7% of Europe-based private debt fund managers and only 4% of the total capital raised in the past decade. Despite having the largest economy in Europe, Germany has less private debt managers than the UK (home to 43% of Europe-based private debt fund managers), France (11%) and Switzerland (7%).
Currently, many private debt fund managers in Germany use so-called ‘fronting banks’ to make loans – a common approach that is deemed legally compliant but inefficient and costly. Under the new legislation, Germany-based managers and their respective funds do not need a banking licence, as long as they are AIFMD compliant. The new rules will also have an impact on funds located outside Germany, such as European Union (EU) debt funds. Fully licenced AIFMD-compliant managers such as those located in France and the UK will now be able to lend into Germany without the need for a banking licence. For fund managers based outside the EU, the rules will only apply if they are fully AIFMD compliant.
According to Preqin’s Private Debt Online, there are currently eight Germany-focused funds looking to raise a combined total of €3.1bn; going forward, we could see this figure grow. With its more open approach to alternative lending, and boasting the largest economy in Europe, Germany could present managers with some strong opportunities to put investor capital to work in the future.