Funds – Advice from a lawyer – Funds are issued exclusively by investment or fund companies. These are also known as investment companies. Fund units can be purchased from branch and direct banks, among others. Funds are part of banking and capital market law.

Table of contents

  1. Funds – types
  2. Funds – definition
    2.1 Funds: actively or passively managed
    2.2 Open-ended funds
    2.3 Closed-end funds
    2.4 Claims – closed-end funds
  3. Investor interests
  4. Financial loss? Advice for affected investors
  5. Media funds
    5.1 Structure
    5.2 Risks
  6. Oil funds
    6.1 Energy funds: oil funds & gas funds
    6.2 Oil funds and oil companies
  7. Aircraft funds
    7.1 Tax considerations
    7.2 Aircraft funds – risks
    7.3 A380 aircraft funds
    7.4 Investors: risk of loss
  8. Energy funds and right of withdrawal
  9. Company – Energy funds
  10. Container funds
    10.1 Unsafe investment
    10.2 Container funds: Obligation to publish a prospectus
    10.3 Container funds & risks
    10.4 Duty to provide information
    10.5 List of shipping container investments
  11. Real estate funds
    11.1 REIT – Real Estate Investment Trust
    11.2 Search funds: an innovative investment approach – but what about your rights?
    11.3 Real estate funds: Risks
  12. Deposit protection fund: How safe is your money with banks?
  13. Investment funds
  14. Investment funds: Risks

Funds – list of products on offer

The list of products on offer is long. There are over 12,000 mutual and special funds in Germany alone.

  • Equity funds
  • Asia funds
  • Biogas funds
  • Biotech funds
  • Container funds
  • Fund of funds – investments are diversified into individual funds
  • Monument funds
  • Energy funds
  • Aircraft funds
  • Guarantee funds
  • Money market funds
  • hedge funds
  • Real estate funds
  • infrastructure funds
  • index funds
  • Media funds
  • Mixed funds
  • Oil funds
  • Patent funds
  • Private equity funds
  • Bond funds (fixed-interest securities such as mortgage bonds, bonds and municipal bonds)
  • Commodity funds
  • Ship funds
  • Solar funds
  • Environmental funds
  • Forest funds
  • Wind farm funds
  • Wind power funds
  • Wine funds
  • Certificate fund

Fund definition

Mutual funds are investment funds intended for private investors. Special funds, on the other hand, are reserved for institutional investors.

The idea of an investment fund is to spread the risk. Funds usually collect investments such as shares, bonds or real estate and the money of many investors in order to invest it.

Investors have relatively little time to invest, as the fund manager takes care of the management and monitors the market. Funds also have no issuer risk, as the shareholders are entitled to their assets if the fund company becomes insolvent. They are financially satisfied by the sale of the investment properties.

Funds also offer higher returns compared to savings accounts. However, they are also riskier and represent a relatively expensive investment.

Distributing funds pay out dividends and interest regularly. Accumulation funds, on the other hand, reinvest the profits made so that investors can benefit from the effect of compound interest.

Funds – actively or passively managed

With actively managed funds, the fund manager is responsible for analyzing and selecting sectors and securities. He manages the fund’s assets according to his expectations of the further development of the market and its risks.

However, as this is speculation, it is not surprising that less than half of all fund managers outperform the equity or bond index. In most cases, investors could therefore save themselves the management fees and go straight for the index. It is true that no one is smarter than the market over the long term.

You can do this with passively managed funds. Passively managed funds replicate the selected index 1:1 under computer control. A DAX fund, for example, consists of the shares of the 30 companies in the leading index. The management fees are usually no more than 0.5% and are relatively low in comparison.

An investment fund is a special fund managed by an investment company. A distinction is made between open-ended and closed-ended funds.

Open-ended funds

With open-ended funds, units can be purchased at any time and also returned to the issuer.

Closed-end funds

Closed-end funds are entrepreneurial investments with a limited term. Shares cannot be redeemed and cannot be topped up after the capital investment has been completed. A closed-end fund is nothing more than an investment in a company, including the potential economic risks.

Closed-end funds are still comparatively unregulated. Commissions that flow into the distribution network are also leading to increased criticism. A report in the Handelsblatt even speaks of the “worst investment in the world”.

In addition, many investors are not aware of the nature of their investment. In addition, the rights and possibilities of closed-end funds are usually unknown to the investors concerned.

Investment objects for closed-end funds

  • Commercial real estate in Germany and abroad, real estate funds
  • Merchant ships, e.g. container and special ships or tankers (ship funds)
  • Plants for renewable energies: Wind power plants, photovoltaics, biomass, geothermal projects
  • Endowment insurance policies
  • Company investments, venture capital, private equity
  • Infrastructure projects
  • Media funds, film funds
  • forests
  • Aircraft funds

Closed-end funds represent an entrepreneurial investment

Shares in closed-end funds represent an entrepreneurial investment. A fund is set up by raising capital for a predetermined project. The volume of the fund is also defined accordingly.

When the placed fund volume is reached, and thus fully subscribed, the fund is closed. Further subscriptions are then no longer permitted.

As a rule, closed-end funds are structured in the form of partnerships. In addition to the equity capital collected, the company usually also uses borrowed capital to achieve the promised return on equity.

The disadvantages of closed-end funds compared to open-end funds are that the shares can only be traded on a few marketplaces.

In some cases, the only option is the secondary market. There, units can be sold prematurely. However, this usually means a relatively high loss compared to the original value. Closed-end fund investors also have no right to demand that the issuer redeem the units during the term.

Due to the nature and structure of a closed-end fund, the investor also bears the entrepreneurial risk. It is not uncommon for this risk to be borne. The risks include

  • Insolvency of the fund with possible total loss
  • Obligations to make additional contributions
  • Lack of information on the intrinsic value of the investment property
  • Loss of value
  • Additional tax payments
  • Bad investments by the management
  • Limited opportunities for closed-end fund investors to exert influence
  • Legal risks

What claims can investors in closed-end funds assert?

In principle, closed-end fund investors can hold many parties liable. These include the economic initiators, founding partners, investment advisors and intermediaries, prospectus auditors, controllers of the use of funds and, in some cases, the financing banks. (Banking law)

In addition to the legal possibilities, the economic considerations are also decisive. Only where funds are available does it make sense for investors to use further funds to assert claims. In the case of legal options, the question of the statute of limitations must be examined regularly.

Investors must be fully informed about the risks. Liability may arise if the prospectus was not handed over in good time before the closed-end fund contract was signed. It must also contain correct information on key points. If this is not the case, the initiators, founding partners and investment brokers may be liable.

Investors’ interests do not always come first

Investors are well aware that the initiators of a fund think first and foremost of their own earnings. In cases where banks supplement the investors’ capital, payments are also due here. Finally, the investment advisors and brokers are responsible for selling the products. Purely out of self-interest, some of them do not take investor-oriented advice very seriously.

If you add up these costs, often only 70% of the investment remains for the actual investment objective. 30% ends up in the pockets of the initiators, employees, brokers and banks. It is then no wonder that the promised return cannot be achieved.

A number of funds are constructed in such a convoluted way that investors cannot get a complete overview of the companies in which they are ultimately involved.

In addition, the investor usually bears the full risk, up to and including total loss. Significant losses are not only incurred in times of economic crisis. In addition to the realization that investors are often obliged to make additional contributions, many cases of fraud have become known in recent years. Herfurtner Rechtsanwaltsgesellschaft mbH regularly informs you about investment warnings.

Funds: Losses? What affected investors can do

Investors should always be aware of their legal options and have them checked by a lawyer in the interests of investor protection. In many cases, there are claims for damages due to incorrect advice or, if applicable, an extraordinary right of termination. In the case of some funds, the initiators can also be held liable.

Another starting point lies in the commission payments. Banks have often not informed their customers about the kick-backs they received from the fund initiators.

Closed-end media funds

One important aspect for investors was that investments in a media fund could be claimed as a total loss in the very first year. As a result, more than 60,000 investors have invested hundreds of millions of euros in closed-end film funds. Over the years, it has become clear that there were relatively few film projects that were able to generate the desired return.

Media fund structure

As a rule, investors participate as limited partners or via a trustee. The trustee buys the rights to a film project that has not yet been produced. The film production is then usually implemented by a service provider.

Investors should always be aware of their legal options and have them checked by a lawyer in the interests of investor protection. In many cases, there are claims for damages due to incorrect advice or, if necessary, an extraordinary right of termination. In the case of some funds, the initiators can also be held liable.

Another starting point lies in the commission payments. Banks have often not informed their customers about the kick-backs they received from the fund initiators.

Closed-end media funds

One important aspect for investors was that investments in a media fund could be claimed as a total loss in the very first year. As a result, more than 60,000 investors have invested hundreds of millions of euros in closed-end film funds. Over the years, it has become clear that there were relatively few film projects that were able to generate the desired return.

Closed-end media funds & risks

In addition to the economic risks up to and including total loss, possible back tax payments should be mentioned in particular. In addition to the untaxed amounts, there are also the corresponding interest payments.

Funds with debt assumption or defeasance structures are particularly affected, as the licensee undertakes to conclude a debt assumption agreement with a bank, on the basis of which the bank must pay the license fees due and the final payment and waives any defenses.

However, this minimization of risk with regard to the tax to be paid is offset by the higher economic risk. In addition to the usual market risks, there are often production delays, delayed exploitation, currency risks and credit risks of the licensees.

In particular, the return naturally depends on whether the film becomes a box office hit or simply flops.

Oil funds

Oil funds and similar investments pose considerable risks for private oil investors – investors should have claims for damages examined.

The sharp fall in oil prices threatens investors with considerable losses. Oil adventures can go wrong for retail and institutional investors. Both face the same risks from oil investments in the gray capital market. The signs are alarming.

Many thousands of private investors have invested their savings in oil funds and gas projects. The fund initiators Texxol, Proven Oil, ECI, Nordic Oil and New Capital Invest have collected around 900 million euros via closed-end funds, bonds and silent partnerships.

Oil funds are closed-end funds. Investor money is collected to invest in companies whose business model is the production of oil. Closed-end funds are based on the principle that the fund initiators raise the necessary seed capital from investors for a specific investment objective.

In this way, issuers can pass on the risks for ship funds, real estate funds, energy funds, etc. to investors. Ideally, the returns flow to investors via annual distributions.

Energy funds: oil funds and gas funds

Like gas funds, oil funds are energy funds, as they invest in energy sources. Oil wells and the associated areas are purchased and developed. The extracted crude oil is then sold. The fund company therefore not only takes care of the purchase of the investment property, but also the subsequent long-term operation.

Until recently, investments in “black gold” still seemed lucrative. The global economy is dependent on this raw material and the Chinese boom would have been inconceivable without oil. So oil fields and oil wells usually sounded like profit. The oil price was also stable for a long time and only went in one direction. Private investors were therefore easily persuaded to invest in closed-end oil funds.

However, there is no fixed, predictable long-term income, as this always depends on the current development of the oil price. Many oil-exporting countries are dependent on high prices for crude oil. However, rising prices are not in sight for the time being and demand remains weak. Supply on the global markets is likely to remain high, as many national budgets are dependent on income from oil transactions.

Oil funds and oil companies

As investors become limited partners in the company, they are exposed to the risk of total loss. Oil funds have therefore never been suitable for conservative investors. Investors who have invested in the closed-end funds via registered bonds and silent partnerships have no say whatsoever.

  • Proven Oil Canada
  • Proven Oil Asia
  • Nordic Oil
  • Nordic Oil USA 1
  • Nordic Oil USA 2
  • Nasco Energie und Rohstoff AG
  • Deutsche Oel & Gas
  • Furie Operating Alaska
  • Ölfonds Norwegen
  • KSH Energy Fund
  • KSH Capital Partners AG
  • New Capital Invest
  • Furie Petroleum LLC
  • Energy Capital Invest (ECI)
  • Namensschuldverschreibung „US Öl und Gas NSV 6“Pylon Performance Fonds

Aircraft funds

In an aircraft fund, private investors use their money to buy an aircraft. This is then rented or leased to an airline. Private investors therefore provide their own capital and invest their money in a fund company.

This capital is then used, usually in conjunction with another bank loan, to purchase one or more aircraft. The aircraft is then usually leased to the airline for roughly ten years.

Investors benefit from a fixed amount, which is distributed annually. The loan is also serviced with the income from the lease agreement. At the end of the term, the aircraft is returned to the company (usually a GmbH & Co. KG). The aircraft is then sold to an airline. The proceeds are used to repay the remaining loan and the rest is distributed to the investors.

The incentive for private investors therefore lies in the annual distributions and the final distribution.

Distributions during the term of the fund and the final distribution less the initial investment thus result in the return for investors. The risk for the investor also appears to be low: an economic loss as well as the maintenance and operating costs are assumed by the airline.

Aircraft funds – tax considerations

Returns are often treated as income from letting and leasing. However, depending on the structure of the fund concept, income from capital assets or from commercial operations may also exist in individual cases.

In order to be able to conclusively assess the tax treatment, it is therefore always necessary to refer to the relevant prospectus for the specific structure of the fund in question.

Risks of aircraft funds

As described above, aircraft funds are supposedly rather safe and profitable investments. This is particularly true in comparison to other closed-end fund investments, such as real estate or ship funds.

The main risks are associated with the subsequent leasing and the sale of the aircraft.

The term of the lease is always fixed. However, it is not always possible to find suitable interested parties who would like to lease or buy a used aircraft. The decisive factor is certainly how modern the aircraft is. The more modern, the higher the chances that the aircraft will be purchased or leased again after the contract period has expired.

There is a fundamental risk of setbacks in the aviation market. Terrorist attacks, such as in 2001, or natural disasters can have a significant impact on the global demand for aircraft. The current example is the coronavirus: at the moment, virtually all aircraft are on the ground. Airlines are canceling all their flights to prevent the virus from spreading.

Further liability risks for foreign contractual partners must also be taken into account. Many legal regulations are different abroad than in Germany. This can lead to problems. There are also currency risks with foreign contractual partners.

In the meantime, many investors have experienced the flip side of the advantages, i.e. the disadvantages. Many investors were never properly informed and instructed about these risks:

A380 aircraft fund

In February 2019, it was announced that production of the A380 would be discontinued as demand for the world’s largest passenger aircraft had fallen sharply. The last aircraft of the type is to be produced in 2021.

More and more airlines want to return the aircraft after the lease expires. Fewer and fewer airlines are interested in buying the aircraft afterwards. In addition, various used A380s that have not been taken over are already waiting for potential buyers. Other aircraft have already been dismantled into their individual parts as there are no potential buyers or lessors.

Private investors have invested around 1.6 billion euros in 21 A38 aircraft.

Due to the low demand, the funds’ forecasts can hardly be met. Without extension options or buyers after the leasing contracts have expired, it will not be possible to achieve the targets set by the funds.

Investors must fear for their money

If the aircraft cannot be sold at the end of the leasing period or if the proceeds from the sale are significantly below the forecast expectations, the risk of being left with high losses increases. This also applies in the event that the leasing airline encounters payment difficulties.

As mentioned above, most airlines are in financial difficulties due to the current coronavirus situation. Not a single airline is considering buying a used aircraft at the moment. On the contrary, they are trying to sell or lease aircraft they own.

Investors are now being hit hard by this risk, which has always been considered unrealistic:

  • Annual distributions are not paid out.
  • Loans from the fund company cannot be repaid as the aircraft are not purchased at the end of the contract term.
  • There is no final distribution.
  • In addition, investors may face tax consequences if they have paid tax on profits in the meantime. This can lead to repayment of the tax benefits obtained to date.

Energy funds – make use of the right of withdrawal

Energy funds have become a losing proposition for many investors.

The fall in the price of oil has punished energy funds that have invested in shares in the energy sector.

This has put pressure on the business of energy producers and suppliers in particular. The performance results of energy funds show that it is risky for investors to invest in products in the energy segment.

Many investors have the option of withdrawing from their unprofitable energy fund contract. Some providers of fund investments sell their products via distance selling channels or through traditional door-to-door sales.

Checking the right of withdrawal

In this case, the possibility of revocation under the right of revocation at the doorstep or under distance selling law should be checked. If the revocation instructions do not comply with the statutory provisions, the investor still has the right of revocation even after the 14-day period has expired.

If there is no other way for the investor to withdraw in an individual case, this option at least offers the chance to limit losses. The losses incurred up to the declaration of withdrawal cannot be reclaimed by way of withdrawal.

Solar funds invest your investors’ money in the construction and operation of photovoltaic systems to generate electricity from the sun’s energy. Solar funds are invested for many years. The state-guaranteed feed-in is an important part of the overall calculation. Investors become co-entrepreneurs and bear the risk of total loss of the investment.

Energy Fund – Energy companies

  • Energiefonds Saarpfalz GmbH & Co. KG
  • MPC Bio Energie Brasilien GmbH & Co. KG
  • Stuttgarter Energiefonds
  • Chorus Clean Energy AG
  • ConTrust Energie Fonds
  • JB EF Energy Transition
  • GAM-Energiefonds
  • Threadneedle Global Energy
  • Candriam Eqs B Global Energy
  • Guinness Global Energy
  • JB EF Energy Transition
  • KBC Equity Oil
  • Mediolanum Ch Energy Equity
  • MFS Meridian Global Energy
  • NN (L) Energy P Cap
  • SSgA Energy Index Equity Fund
  • Swisscanto (LU) Equity Global Energy
  • Threadneedle(Lux) Global Energy Eqs
  • Windenergiefonds / Windenergie
  • Leonidas Associates XIII – Windfonds Frankreich
  • Leonidas Associates XIV Wind GmbH & Co. KG
  • PROKON Regenerative Energien GmbH
  • Solarfonds
  • DCM Energy Solar 1
  • DCM Solarfonds 4
  • GSI Solarfonds Deutschland 3
  • SolEs 21
  • SolEs 22
  • SolEs 23
  • PT Energiefonds SolarInvest GmH & Co. KG
  • Sonnenstrom alpha GmbH & Co. KG
  • MPC Solarpark
  • Ölfonds
  • POC Proven Oil Kanada
  • MPC Deepsea Oil Explorer
  • MPC Deepsea Oil Explorer GmbH & Co. KG
  • Erdgasfonds
  • DEF Deutscher Erdgasfonds I GmbH & Co. KG („DEF I“)
  • DEF Deutscher Erdgasfonds II GmbH & Co. KG („DEF II“)

Container funds

Container funds & container investment – For a long time, container investments were regarded as investments in a rapidly growing market that guaranteed high returns. Since the 2008 crisis in shipping funds, container funds have also been affected.

The supposed security of recent years is now over. Container investments were considered a relatively safe form of investment, as the containers are usually leased to shipping companies over a fixed, long-term period. Since the financial crisis, the risks of container funds have become clear.

Investors are involved in the entrepreneurial risk (BGH, judgment of 08.07.2010, ref. III ZR 249/09) and now fear considerable losses and in some cases must also expect a total loss for container funds.

Overcapacity and falling charter rates are leading to a decline in the market value of containers. Container funds were often advertised as high-yielding and low-risk. The opposite is now the case.

Not a safe investment

Container investments and container funds are not safe, high-yield investments that are also ideally suited to private investors.

Manager-Magazin writes that “investors can hardly properly assess what the risk/reward ratio looks like in individual cases.” There were over 38 million containers in 2015. Of these, more than 45% were leased by shipping companies and shipping lines in container leasing.

Like ship investments, closed-end investments also offer high potential returns at high risk. Investors have already invested around 1.2 billion euros in container funds in 2013. The largest provider in this area speaks of over 62,000 customers – Handelsblatt.

The structuring options for container funds vary greatly. Subscribers often participate as limited partners or indirectly via a trustee. A GmbH & Co. KG is then chosen as the corporate form.

Container funds – prospectus requirement for all direct container investments

According to the draft of the Financial Market Amendment Act, container direct investments will in future be subject to the Asset Investment Act even if they do not provide for a redemption obligation.

The correction to the Small Investor Protection Act is intended to ensure that direct investments in tangible assets & container funds (e.g. participations in the acquisition of individual containers), where the repurchase of the investment depends on the will of the provider or a third party, are also covered by the Act. The law is due to come into force at the beginning of 2017.

Risks of container funds

In principle, container funds are subject to the same risks as all closed-end funds. In addition to a long-term commitment of the invested capital, there is a relatively high risk of loss in the event of an unexpectedly unfavorable economic development. Depending on the legal form of the company, the risk profile and the origin of the borrowed capital, further losses cannot be ruled out.

The specific risks associated with container investments are exacerbated by a weakening global economy or disruptions to the exchange of goods in the event of unrest or war.

Rental prices then come under pressure and the expected income from the container fund can no longer be achieved. Increasing insurance premiums can also lead to lower returns.

Other risks associated with container funds include

  1. increased purchase prices of containers, which depend on the current price of steel
  2. Insolvency of the buyer
  3. Falling rental income due to market changes
  4. Fluctuations in short-term rental contracts
  5. resale price of containers at the end of the fund’s term that cannot be precisely calculated
  6. Currency risks (especially with foreign currency loans)

Container funds – information obligations

Investors must be fully informed by investment advisors about the considerable risks of their respective investment. The risks that must be disclosed include in particular

  • the total loss risk of container investments
  • the currency risk associated with foreign currency loans
  • the high distribution costs (more than 30% for some funds)
  • uncertain market situation due to the lack of a secondary market
  • the possibility of reclaiming distributions in accordance with Section 172 (4) HGB (limited partner liability)
  • Kick-back payments (commissions) to banks and brokers

The investment must also match the investor’s investment objectives. This is always not the case if the investor is looking for a secure form of investment.

In the event of incorrect issue prospectuses, claims against initiators, founding partners and investment brokers may be possible via prospectus liability.

List of shipping container investments

  • Magellan Container Investment
  • Buss Capital
  • Buss Capital Exklusiv Container 1
  • Buss Container Fonds 3
  • Buss Container Fonds 4
  • Buss Container Fonds 5
  • Buss Container Fonds 6
  • Buss Global Container Fonds 1
  • Buss Global Container Fonds 2
  • Buss Global Container Fonds 3
  • Buss Global Container Fonds 4
  • Buss Global Container Fonds 5
  • Buss Global Container Fonds 6
  • Buss Global Container Fonds 7
  • Buss Global Container Fonds 8
  • Buss Global Container Fonds 9
  • Buss Logistics Container Fonds 1
  • Buss Logistics Container Fonds 2
  • ConRendit 1
  • ConRendit 2
  • ConRendit 4
  • ConRendit 5
  • ConRendit 6
  • ConRendit 7
  • ConRendit 8
  • ConRendit 9
  • ConRendit 10
  • ConRendit 11
  • ConRendit 12
  • ConRendit 13
  • ConRendit Navigare 1
  • ConRendit 16 Tankcontainerfonds
  • Deutsche Bank DB Containerfonds
  • DCM Deutscher Containerfonds Madeira
  • DCM Deutscher Containerfonds Madeira 2
  • DCM Deutscher Containerfonds Madeira 3
  • IGB Container One
  • IGB Container 2
  • IGB Container 3
  • IGB Container 4
  • IGB Container 5
  • P&R Container Insolvenz
  • Schroeder & Co. Container Fonds Österreich 3
  • Schroeder Logistik Investment Fonds 1 und 2

Deposit protection fund: How safe is your money with banks?

Deposit protection fund – a term that often has an abstract meaning for the layman and at the same time raises questions: How safe is my money in the bank? What happens in the event of a bank failure? What is the difference between the various protection funds? We receive similar questions again and again in our law firm. In this article, we would like to explain this complex legal area in detail and get to the bottom of the deposit protection fund issue.

The basics: What is a deposit protection fund?

Let’s start with the terminology: The Deposit Protection Fund is a statutory or private institution that aims to protect customers’ deposits with credit institutions, i.e. either banks or savings banks. In the event of insolvency of the institution, this fund secures your deposits and thus preserves your hard-earned money. The existence of deposit protection funds is an elementary component of the banking and savings bank system.

National vs. EU-wide: differentiation between protection funds

When looking at deposit guarantee funds, there are two main players to distinguish between – the national and the EU-wide guarantee funds.

  • The national deposit insurance funds consist of the statutory deposit insurance scheme and the deposit insurance fund of the Association of German Banks (BdB).
  • The EU-wide deposit insurance scheme (EDIS – European Deposit Insurance Scheme) is still in the planning phase and has not yet been implemented.

Statutory deposit insurance: statutory protection

Statutory deposit insurance is the basic protection for all depositors of a bank. It is provided by the Entschädigungseinrichtung deutscher Banken GmbH (EdB). The amount of statutory deposit protection is limited to 100,000 euros per customer and bank and applies to all EU member states.

Deposit protection fund of the BdB: Voluntary additional security

The BdB’s Deposit Protection Fund provides additional security. This works as a private guarantee fund and protects depositors over and above the statutory deposit guarantee. The level of protection depends on the equity capital of the respective bank.

European Deposit Insurance Scheme EDIS: A project for the future

The European project for a uniform deposit guarantee scheme (EDIS) is currently still in the planning phase. It aims to establish an EU-wide safety net for all depositors and thus strengthen confidence in the banking system.

A real-life case: how deposit protection works

Düsseldorfer Hypothekenbank AG had to file for insolvency in 2014. Thanks to the statutory deposit guarantee and the Deposit Protection Fund of the Association of German Banks, customers’ deposits were nevertheless safe. A total of over six billion euros was returned to customers.

Real estate funds

Real estate funds lawyer – In real estate funds, capital from several investors is pooled and invested in real estate. There are three different types of construction.

Closed-end real estate funds

In most cases, this involves the financing of a single property. As soon as the capital required for the project has been paid in full, the fund is closed to other investors. From this point on, deposits and withdrawals are only possible under certain conditions.

Open-ended real estate funds (OIF)

An open-ended real estate fund usually consists primarily of real estate holdings. The open-ended real estate fund is a legally identifiable special fund. Investments can be made at any time and paid-in capital can be withdrawn at any time.

For this reason, these funds have a large number of shareholders and many real estate properties. Mutual funds are designed for private investors. Special real estate funds, on the other hand, are designed for institutional investors.

REIT – Real Estate Investment Trust

A real estate investment trust is a corporation, usually listed on the stock exchange, that invests in real estate properties. A REIT is subject to special taxation and supervisory rules.

Real estate funds and risks

The economic success of a closed-end fund essentially depends on whether the property can be let. Investors are often promised that the rent will be guaranteed by another company.

However, it may turn out that this company does not have sufficient financial resources. If this so-called guarantor becomes insolvent, the rental income required by the fund can often not be achieved. The relatively high rents cannot usually be achieved on the open market. As a result, the real estate fund loses value overall.

If there are properties that cannot be rented out, the fund may become insolvent and the entire investment may be lost. If the investment continues to run and the proportion of debt financing is high, the loan installments can lead to major financial losses for investors. Currency risks for fund properties abroad can also lead to further, not inconsiderable losses.

Real estate funds – high losses in liquidation

In recent years, there have been bankruptcies and convictions of individual founders for investment fraud. Investors can therefore suffer heavy losses on products that are usually offered as risk-free. Investing in a closed-end real estate fund can result in a total loss and/or a high level of debt.

Search funds: an innovative investment approach – but what about your rights?

Search funds – remember this term, because it could mark a new era in investment strategy. Originating in the USA, they have been conquering Europe for some time now and represent an attractive alternative for the generational succession of SMEs. At the same time, however, they also pose legal challenges that need to be overcome.

Search funds: what they are and how they work

The search fund model was first introduced at Stanford University in the 1980s and has since developed into an established financing model, particularly in the USA. These are institutional investors who invest in qualified young successors, often MBA graduates, and in return grant them a stake in the company to be taken over.

The process essentially consists of the following four steps:

  • Establishment of the search fund: As a rule, only the respective searcher operates, but receives financing from the investors for the search phase, which usually lasts two years.
  • Search phase: During this period, the manager searches for suitable takeover candidates. A clear focus on specific sectors or company sizes should be emphasized as best practice.
  • Investment phase: Once a suitable company has been found, the acquisition takes place. The financing for this is largely provided by additional capital from existing investors or, if necessary, new investors.
  • Management phase: After a successful acquisition, the search fund founder must successfully manage the company. If he succeeds, he can look forward to a high profit. If he fails, on the other hand, considerable losses may be incurred.

The legal dimensions of a search fund

Even if the search fund approach appears simple at first glance, it does harbor a number of legal pitfalls. Especially in the search and investment phase, there are often complex legal issues that need to be clarified.

Drafting the search fund contract: challenges and best practices

A central legal field in the process of a search fund is the drafting of the search fund agreement. This essentially regulates the relationship between the searcher and the investors and also defines the legal framework of the search fund. The main contents are

Searcher fee: How high should it be and under what conditions is it paid?

A central legal field in the process of a search fund is the design of the search fund contract. This essentially regulates the relationship between the searcher and the investors and also defines the legal framework of the search fund. The main contents are

  • Searcher fee: How high should it be and under what conditions is it paid?
  • Amount of investor participation: How high should the investors’ participation in the company to be acquired be?
  • Exit rights: Under what conditions can the investors exit the search fund?
  • The drafting of the search fund agreement requires a high degree of expertise and know-how, especially from a lawyer who works in the field of commercial or corporate law. Clarity and transparency are always the top priority here in order to avoid legal disputes later on.

Due diligence: what you should consider

Just as important as drafting the contract is carrying out careful due diligence on the company to be acquired. In this process, the seeker puts the target company through its paces together with its advisors, in particular lawyers and management consultants. The aim of this process is to identify and, in the best case, eliminate any risks and liability traps.

Search funds as an opportunity and a challenge

The above illustration makes it clear that the search fund model represents an attractive option for company succession for both the seeker and the investors. At the same time, however, the results of the research also show that the process is associated with a number of legal and business challenges that need to be overcome.

Be aware of this area of law and seek legal advice if in doubt. An experienced lawyer will be able to help you avoid legal pitfalls and offer you a tailor-made solution for your individual situation. This is the only way to exploit the full potential of a search fund and achieve long-term success.

Investment funds

In an investment fund, investors’ money is pooled and managed by a corporation or investment company.

These special assets are invested by the fund manager in one or more areas. As a rule, the manager must follow the specified investment strategy. Investors receive unit certificates for the amounts paid in.

The investment usually takes the form of shares, bonds, derivatives, real estate or commodities. The aim is to minimize risk by diversifying across different asset classes.

The special assets remain in the possession of the investors. It is separated from the other assets of the corporation. This is intended to protect investors in the event of insolvency. Profits generated are either distributed to the investors or reinvested. The latter increases the value of the share certificates.

Investment funds: risks at a glance

The overall risk of the investment fund is made up of the general capital market risk, the interest rate risk, the risk of a total loss and, where applicable, the currency risk. In the case of shares, the incalculable entrepreneurial risk plays a particularly important role.

The general capital market risk can cause the value of the shares to fall below the purchase price. The prices of shares and interest-bearing securities are also subject to considerable fluctuation risks.

An entrepreneurial investment carries the fundamental risk of total loss. If the market interest rate level rises, interest-bearing securities generally fall. Currency risks must always be taken into account if an investment is made in a foreign currency.

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