A law with few friends

Germany’s coalition government is working on a law for private equity. A number of drafts have been published, but no one seems satisfied, writes editorial director Philip Borel.

 Philip Borel

After years of uncertainty over how private equity funds based in Germany should be taxed, the government is determined to deal with the issue once and for all. During the last year, the Ministry of Finance has published a number of drafts of a law on the subject, the so-called Private Equity Gesetz. Still pending, the law has already achieved notoriety, and throughout the process the government’s efforts have met with fierce criticism from a range of parties.

Frustrations about the government’s proposal to limit tax breaks for German private equity funds to early-stage investment funds with less than €20 million under management have been expressed. And not just by those who would suffer the most obvious set-back – general partners of funds in excess of  €20 million of equity. Germany’s private equity trade association, the BVK, has described the Ministry’s stance as a “missed opportunity” in that it failed to create a framework in which the whole industry could flourish, rather than just a small section of it. 

Equally critical noise has been coming from the German buy side. The Bundesverband Alternative Investments (BAI), which lobbies on behalf of institutional investors participating in private equity and other non-mainstream asset classes, has urged the government to throw out the draft and start from scratch. In a letter to Federal Finance Minister Peer Steinbrück in September, the BAI described the pending law as “wholly inadequate” to bring about the kind of tax transparency private equity funds in Germany depend upon in order to attract institutional capital. 

The BAI reminded Steinbrück that according to the European Venture Capital Association, Germany already has one of the least conducive legal and fiscal frameworks for private equity investment in Europe. If the Ministry’s current plans were to become law, the BAI expects institutional investment in German funds to decline, despite German businesses having “a significant need for private equity funding”. Ultimately, it says the German economy as a whole would suffer.

It seems unlikely that the BAI’s intervention can succeed. According to private equity professionals, the Finance Ministry’s refusal to promote later-stage private equity funds in Germany is underpinned by inter-coalition quarrelling. Steinbrück’s left-of-centre Social Democratic Party (SPD) is more sceptical of the benefits of financial investors operating in Germany than Chancellor Angela Merkel’s Christian Democrats (CDU).

Peter Struck, the leader of the SPD faction in Germany’s lower chamber, recently said the country needed laws to help its corporations in strategically important sectors protect themselves against the growing influence of financial investors – including private equity and hedge funds. He suggested limiting private equity ownership of German businesses to 25 percent might be appropriate.

He also said his party was ready for a confrontation with Merkel and her party over the issue later this year.   

Ironically enough, the Private Equity Gesetz appears to have failed to impress even close allies of the SPD: Germany’s powerful trade unions. IG Metall, which has more than two million members in metal-processing businesses, thinks the idea of promoting funds with up to €20 million in commitments way too generous. IGM would much rather dust off an earlier version of the law – which had a limitation on tax breaks to funds with as little as €500,000.