Germany becomes increasingly important for asset managers from all over the world. They can make use of the so-called “Master-KVG“ model to manage a German investment fund without establishing a German management company. A seasoned expert in investment law and partner at Simmons & Simmons, Dr. Harald Glander shows how this model works.

Dr. Glander, can you please briefly describe what a Master-KVG model is?

Glander: The Master-KVG is an investment management company (UCITS management company and/or AIFM) authorised and supervised by the German Federal Financial Supervisory Authority (BaFin) and licensed under German investment law. From a legal perspective, the Master-KVG is the manager of the investment fund including its segments and has ultimate responsibility for the portfolio management, risk management and administrative services. In practice, however, the Master-KVG limits its services in particular to pre-trade controlling, monitoring investment limits, risk management and administrative services.

What is the purpose of a Master-KVG?

Glander: From the asset manager’s perspective, the Master-KVG processes the administrative services for the German special fund and its segments. Hence, the risk and administrative tasks remain with only one entity: the Master-KVG. For German institutional investors, the Master-KVG model is a very effective way to consolidate its investments on one administrative platform.

What is the function of a Master-KVG?

Glander: It is merely a fund administration platform and responsible only for fund accounting and other administrative functions not linked with portfolio management. However, from a regulatory perspective the Master-KVG is responsible for the observation of German investment law requirements and takes charge of, for example, fund accounting, controlling or risk management. Furthermore, the Master-KVG is required to install a compliance function. When a Master-KVG manages an investment fund, it acts in its own name but for the joint account of the investors of the investment fund. This means that the Master-KVG is liable for breaches of investment limitations and other errors. In this case, liability claims by the investors may arise.

Who typically makes use of a Master-KVG model in which situation?

Glander: Foreign asset managers frequently use the Master-KVG model to manage a German investment fund without establishing a German management company. Talking about investors, the Master-KVG model is the preferred investment platform for German institutional investors, predominantly insurance companies, that already have a German (special) fund in place. The Master-KVG model provides such investors with a useful instrument to elect the best or preferred asset managers for each of their asset classes. Just to give you a better impression of the importance: the total amount of AuM in Master-KVG‘s dated 31 October 2018 was € 1.6 billion.

Who are the parties of a Master-KVG Model and what should asset managers from outside the European Union be aware of?

Glander: The model consists of at least five parties: one or more (German) investor/s, the Master-KVG, the custodian, one or more asset manager/s that seeks to provide portfolio management services to German investor/s and the investment fund in corporate or contractual form including its possible fund segments. If the asset manager is domiciled in a non-EU country, it must be licensed or registered for the purpose of asset management or financial portfolio management, subject to supervision, and the cooperation between BaFin and the respective supervisory authority of the non-EU asset manager must be assured.

And what happens if this licence or registration requirement is not fulfilled?

Glander: In this case, the Master-KVG is only permitted to delegate the portfolio management to an unregulated entity with prior approval from BaFin. In practice, the institutional investor will select the asset manager. From a legal perspective, however, the Master-KVG appoints the asset manager and enters into a delegation agreement, known as the investment management agreement or the IMA. Usually, such IMA is based (more or less) on the template IMA provided by the German Investment Funds Association (the BVI).

Are there any particularities for non-German asset managers?

Glander: The Master-KVG model provides foreign asset managers approaching the German market with the opportunity to set-up a German fund without the need to establish a German regulated management company. The non-German asset manager has to collaborate with a German Master-KVG which has the necessary licence and the administrative platform in place to set up and manage a fund. Nevertheless, the set-up process remains the same compared to Master-KVGs of German asset managers.