When US fund managers (USFM) tap into the EU investor pool with their private funds, German institutional investors (such as pension funds and insurance companies) are often among the targets (Regulated Investors).

Regulated Investors must maintain ‘guarantee assets’ (GA) to answer to potential insurance and pension claims. The GA of most Regulated Investors cannot be randomly invested but are subject to strict allocation rules (so-called ‘quotas’). Being familiar with these rules is key to successfully raising capital from Regulated Investors.

A Regulated Investor can invest in a private fund if that fund qualifies for one of the following quotas: (i) the participation quota, capped at 15% of the GA, (ii) the real estate quota, capped at 25% of the GA or (iii) the quota for other private funds, capped at 7.5% of the GA. Investments in funds qualifying for the first and third quota will also be calculated towards a risk capital investment quota (containing other eligible assets), which is currently capped at 40% of GA. Private funds with private equity (VC, growth, and buy out), infrastructure and active debt strategies are usually eligible under the participation quota.

The above fund quotas are only available if certain conditions are met. As a rule of thumb, a Luxembourg (parallel) fund managed by an EU (host) alternative investment fund manager can qualify for all the quotas. A US fund managed by an USFM can only qualify for the participation quota. A Cayman fund cannot qualify for any of the quota. Apart from those residence conditions, private funds must meet certain leverage, reporting and transferability conditions in each quota.

The quota rules were recently amended to boost investments in private funds and infrastructure assets. Regulated Investors can now allocate up to 5% of their GA to infrastructure investments. Such allocations will not consume any room available within the above-mentioned quota. The concept of ‘infrastructure’ is broad and covers equity, debt, direct and indirect investments tied to building, expanding or operating infrastructure. If an infrastructure investment is made through a private fund, the investment must still comply with the above-mentioned quota conditions. Simultaneously, the above-mentioned risk capital investment quota was increased from 35% to 40%, allowing more room for buyout, VC, private debt and infrastructure investments.

The old rules already included a fallback quota of 5% of the GA for investments that do not comply with the relevant quota conditions. Under the new rules, the fallback quota can now also be used for investments that are quota eligible but exceed the relevant quota limit.

The amended quota rules create new opportunities for USFM raising capital in Europe.

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