Germany considers its own Volcker rule

Germany is considering measures that would prevent its largest banks from investing in private equity funds and potentially restrict their lending power to the asset class, but all is not as bad as first feared.

The proposal, which would have an effect similar to the US' Volcker rule, prohibits banks with deposit taking functions from holding financial instruments. Germany-based legal sources tell PE Manager that the definition of “financial instruments” under the proposals is broad enough to capture private equity funds.

However the proposal is expected to only affect the largest banks in Germany, namely Deutsche Bank, Commerzbank and Unicredit. And it is unclear if these three banks are significant investors in private equity. 

Last year Michael Klein, head of equity and fixed income at Commerzbank, told PEI's Research & Analytics division that the bank halted commitments to private equity funds because of political pressures, deeming the asset class too risky.

Uni Credit’s German operations fall under the Hypovereinsbank brand, and is reportedly looking to sell all of its private equity fund interests due to political and regulatory pressures as well. 

Deutsche Bank was unable to comment on its private equity investment activity by press time. The bank invests in the asset class across various entities within its corporate structure, making it difficult to track total private equity investment figures. 

LESS CREDIT AVAILABILITY?

Recent media reports have also bought attention to the proposals' apparent restrictions on private equity lending, but it appears only funds that take on “substantial leverage” will be hit by the rule, according to legal sources.

The Alternative Investment Fund Managers directive, which Germany must transpose into national law by July, considers a fund substantially leveraged when the total exposure of the fund exceeds three times its net asset value. 

However, it is not common practice for funds to acquire debt. Instead loans made for a leveraged buyout are taken on by the target company.

Legal sources tell PEM that after a long debate German policymakers will not count leverage held by portfolio companies as leverage held by a parent fund. 

Accordingly it is rather unlikely that private equity funds will be seen as substantially leveraged if they are structured correctly, said one Munich-based lawyer.