Closed-end fund

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In the closed-end fund (English closed- end fund ( CEF) ) can usually, unlike mutual funds, are invested only in a specific placement period, then the fund is closed. The purchaser of a unit in a closed end fund is an entrepreneur ( usually limited partner) with corresponding risks.

Major capital goods for closed-end funds are in addition to real estate for example, ships ( ship funds ) and installations for the production of renewable energy (eg wind turbines ). These are also called alternative investments for their investment priorities. There are also closed-end funds in the secondary market capital life insurance ( U.S. life, British life, German life ) to invest, and eventually the venture capital or private equity firms are to be mentioned. Up to a tax change in 2005 also films ( media fund ) were a common capital good. In 2010, € 10.8 billion, according to industry association VGF Verband eV Closed-end funds have been invested in closed-end funds, € 5.8 billion of which are equity, ie by investors collected investment amounts. As the market closed-end funds except the prospectus liability was not subject to state control, they spoke also of the gray capital market. As a control instrument and are now enforced has the Prospektierungsstandard according to IDW (Institute of Chartered Accountants ), who calls for closed-end funds IDW S4. In addition, each initiator of closed end funds, a prospectus approval by the German Financial Supervisory Authority ( BaFin) must obtain prior to start of sales, which however merely attests that prospecting is carried out according to form. A business is not checked by the BaFin.

Closed-end funds have come under fire for fraud cases, adverse investment outcomes and lack of transparency. The Federation of Consumer Organizations calling for a general prohibition of active sales closed-end funds for private investors, similar to that existing in all EU countries except Germany, Austria and the Netherlands already a mediation only up to five percent of the free assets of a private investor and a clearly visible indication of the risk of total loss. The consumer advocates rely on estimates that over 20 years, 90 percent of closed-end funds did not reach their destination and 50 to 70 percent achieved a loss. You assess closed-end funds because of the risk of total loss of 99 percent of the investors as inappropriate. Which came into force on July 22, 2013 Investment Code of closed-end funds are regulated for the first time comprehensively. The above demands by consumer protection have been implemented only partially.

• 2.1 Closed- end real estate funds
• 2.2 ship funds
• 2.3 Renewable Energy

• 3.1 blindpool
• 3.2 From conception to resolution

Opportunities and risks of closed funds

Closed-end funds are usually designed as a limited partnership with limited liability (GmbH & Co. KG ). The shares in the company over a given placement period will be offered for sale. Is the planned equity ratio reached, the fund is closed. With the collected capital (equity ), the emission costs are paid for and acquired the assets optionally using additional debt. Issue costs are relatively high (about 15 to 20 %), which was repeatedly subject to criticism, especially of consumer protection associations. The debt ratio depends inter alia on the asset from (usually between 30% to 70 %).

The investor with a fixed amount of the limited partnership ( limited partnership ). The minimum level of this amount is dependent on the requirements of the fund initiator and the asset. It is usually 5000-25000 Euro, plus 0-5 % premium. The investment horizon is long-term and depends, for example, of the economic useful life of the asset or the envisaged time of sale.

The investor binds over the term of the investment. A trading or daily pricing affiliated with option to return to the initiator, such as investment funds can not exist by design. In order to increase the marketability factor has been established for the recovery of returned Shares a secondary market, such as the Hamburg Stock Exchange.

The aim of participation is to generate operating income in the form of annual dividends. Total revenues are expected to exceed the amount invested.

Major capital goods for closed-end funds are:

• Commercial real estate at home and abroad
• Merchant ships of every size and type, for example: container vessels and special ships or tankers of Kümo to Malacca Max
• Wind, photovoltaic, biomass, geothermal power plants
• Dollar -oriented, British and German capital life insurance ( supplementary pension schemes )
• Private equity ( equity investments )
• Other: Forest, aircraft, railways, etc.

There is a wide range of income opportunities that are caused by the different market developments of the segments. In order to assess the potential growth of the investment, one needs to know and examine the key success factors of the asset classes.

Prospects

In addition to the intended profits of the company closed-end funds in the past have often been used as a tax deferral models: Until 11 November 2005, closed-end funds were launched with ( in the initial phase ) calculated high losses of the Company to give the investor tax loss assignments. If a private investor had a high marginal tax rate, could postpone the date of taxation on later with a stake in a closed end fund, when the personal tax rate will probably be lower. It is in this case not to tax savings, but to tax deferral models. These possibilities have now been largely restricted by law. With the introduction of § 15a and § 15b German Income Tax Act restricting the offsetting losses in limited partners was introduced by the legislator. § 15a of the Income Tax Act provides that a loss offset is excluded, unless there is a negative capital account of the limited partners or by the loss share increases. This is justified by the fact that the limited partner is liable only limited amounts ( with the amount of his capital contribution ). In this respect it should also tax law can charge and only compensate losses up to the amount of his investment. § 15b German Income Tax Act provides for the prohibition of tax -deferred, after losses in connection with a tax deferral model with neither business income may be offset against income from other types of income.

The closed-end funds has therefore developed from the tax deferral towards the flats lately. A main goal is to achieve an above average after-tax return. To this are often tax peculiarities of the individual assets ( for example, the tonnage tax on vessels or the depreciation in real estate ), but also used special concepts (eg foreign permanent establishments ).

Another essential aspect of return arises from the fact that the cash holdings of the investment company is limited to the operational costs to be expected as a liquidity reserve. The peculiarities of the installation in demand, unlike in the case of open-end funds, no reserve of cash to pay off exiting willing investors. Since the cash reserve in the fund is thus significantly lower in the rule, the yield is not reduced by the weighted average money market rate of interest.

Risks

Loss of tax benefits

Assuming the tax office the Fund lack of profit, the tax benefits obtained are subsequently lost. A significant proportion, especially of closed real estate fund in East Germany, thus proves to be a boomerang for investors. Losses from tax -deferred exchanges, where the taxpayer is a party after 10 November 2005 or was started for the after 10 November 2005 with the outside sales may be neither balanced with business income with income from other types of income ( § 15b German Income Tax Act ).

Total loss risk

For closed-end funds no deposit insurance fund is considered. Regarding breaches of obligations or failure of fund managers usually liable only their equity. The financial statements of insurance companies is increasing, but is not yet widespread. May occur, especially in the wake of an unfavorable economic development in the total loss of the investment. Another risk factor is fraudulent intentions of the parties.

Liability and loss

Lack of economic success, depending on the legal form of the fund, lead to a de facto funding obligation. This is especially true for the GbR funds. Although the partners of a general partnership is not bound by the recent decision by the Federal Court to make additional contributions to society. But since he personally liable for the liabilities of the fund company, he regularly has only the choice between a voluntary additional payment or insolvency of the Fund; then the full liability occurs. In addition, the Federal Court ruled that the owners of the Fund those other shareholders who do not participate in a restructuring, may exclude from society. This has the consequence that the departing shareholder must balance their capital account, which can economically equivalent to a margin. In the fund in the legal form of the KG, in which the investor participates as a limited partner, he is liable "only" with his investment. Here, however, the liability for received but not earned by the Fund ( generated ) distributions can ( for example, rent guarantees ) rekindle ( § 172 HGB).

In many cases, closed-end funds are financed by its internal financing to also include signatory level with a loan. Possible tax advantages are increased if necessary. On the other hand, in case of poor performance could easily be a negative leverage effect arise.

Lack of fungibility

A sale of shares prior to the dissolution of the Fund is only possible if one even finds a buyer for it. The price is based, as always, to supply and demand. So far no functioning secondary market for these shares has been formed, even if there are attempts to eg the Fondsbörse Germany AG broker participation (see links). In particular, the highlighted social contract often provides for a right of participation of the initiator, so that transfers between two parties may be able to be entered into only subject to the approval of the fund management. Although the agreement can usually be refused only on " good cause ", but the transfer of ownership is subject to change. Interestingly enough, can be a " good cause " for example, an excessively low price, since he would have influence on the assessment of the participation of all other shareholders.

Conflicts of interest on the part of the initiators

Notwithstanding since 1998 came into force Prospectus Act and the exporting Prospectus Regulation BaFin controlled only the formal completeness of the information, but not their veracity. Conflicts of interest are therefore rarely disclosed. Not infrequently economize the limited partners and initiators into their own pockets by close to the not inconsiderable soft costs of partly more than 25 % additional contracts with private companies to correspondingly favorable terms for themselves. This procedure does not fall on often because investments are in closed end funds often communicated as the fiduciary and the Trustee is not uncommon dominated by the initiators and / or the founding societies.

Lack of personal suitability of the Board

The investor also should be aware that he entrusted the management of the Fund his savings usually over many years. Does the management not, therefore, necessary qualifications and experience, there may be losses.

Closed-End Funds by Asset Class (selection)

• Real estate funds
• Media Fund ( especially Film Fund )
• Ship funds
• Private equity funds
• Aviation Fund
• Forest fund
• Infrastructure Fund

Closed-ended funds

When closed-end property fund invests the investor in real estate, usually in commercial properties such as office or retail, logistics, as well as residential properties. It is thus co-owner, ie entrepreneurs, with corresponding risks, but also all the opportunities of the market. Fiscally are usually income from rents and leases (§ 21 Income Tax Act) before.

The individual properties are described in detail in a prospectus, which the investor - in contrast to open-end property funds - allows transparent investment decision. In achieving the planned investment amount of the placement period is ended, that is, there are no further monies raised more, and the group of investors is thus defined. In technical jargon, this means that the fund is closed.

Ship funds

Renewable Energy

It invests primarily in the production of energy from renewable energy (wind, solar thermal, photovoltaic, biomass and geothermal ). The yield at Energy Fund is determined mainly by the energy yield. Borrowing costs may be the highest posts in the cost. However, they are usually fixed for a long time and can not be surgically affected.

Digressions

Blind Pool

The investor in a closed real estate funds or other closed-end funds, in which he does not know at the time of the investment decision, object or which investment properties in which it invests. Selection criteria for the fund management developed and acquired parties, or buys undeveloped land or other investment objects are circumscribed regularly. In a blind pool of investors must have significant reliance on the fund management.

In the past, with blind pool fund at the real estate funds meant. Currently, however, almost all the growth sectors and product innovations come not from without the concept of blind pools. Items in the secondary life insurance market, in private equity or in U.S. mortgage employ this construction. The specific investment objects are still unknown at each placement. Often in blind pools, a foreign company is the acquisition and management of the portfolio entrusted (often large real estate company whose reputation can facilitate the assessment of the offer ).

In the market overview published by the magazine cash in issue 11/2006 are already around 40 % of the 265 fund blind pools shown.

From conception to resolution

Before a closed-end fund & Co. KG is created by the establishment of limited liability, it must be designed: it is placed a kind of business plan that demonstrates the profitability of the company. In addition, the initiator of the Fund trades in all relevant contracts. Is the design so far concluded that the Fund may be excreted in the investment phase, the company is set up and filed the prospectus for review and approval to the BaFin. After the release of the initiator are the funds in the distribution, that is, banks and financial service providers begin with the placement of shares in the GmbH & Co. KG. Is there sufficient capital has been acquired in order to acquire the capital item, the Fund for more new plants will be closed and changes in the operational phase: In the following years, the Company manages the capital item (usually by mandating a service by the management ). As part of the annual shareholders' meeting, the shareholders make the most important decisions, such as the amount of the income distribution, and relieve the responsible management and a possibly existing Anlegerrat. If agreed in the shareholder contract term has been reached, causes dissolution of the Fund: The capital item is sold, the sale proceeds distributed to the shareholders and then dissolved the society.

Legal basis

Since July 22, 2013 applies to managers of closed and open-ended investment fund, the investment code ( KAGB ). Herein, the European Directive on Alternative Investment Fund Managers (AIFM ) Directive is transposed into German law. Closed-end funds are in KAGB as an alternative investment funds (AIF ) and are divided into public and special funds. With the KAGB there is in Germany for the first time a common framework for providers of open and closed-end investment funds.

Tax Aspects

The tax treatment of closed-end funds depends on the activities of the Fund and its legal form. Typically, the investor has either income from renting and leasing or business income, in rarer cases, it may also have other income or capital income.

Closed-end funds are designed as regular tax savings until 2005. The tax savings was in closed real estate funds reached by high impairment charges. Special depreciation allowed the Berlin Assistance Act ( BerlinFG ) to promote West Berlin and the Development Areas Act ( FördGG ) to promote the development in the new federal states. For media fund the tax savings was by prohibiting the recognition of internally generated intangible assets reached ( § 5 para 2 ITA). The film made ​​right must not be activated; so the total manufacturing cost of each film are immediately deductible business expenses. In ship funds, it is the tonnage tax, a flat, on the size of the ship (tonnage ) related income tax, the tax savings possible. The Finance Minister has repeatedly attempted to regulate by decrees (known as BMF ) the tax treatment of the funds. Ultimately, the tax savings have been made mostly impossible by the introduction of § 15b Income Tax Act in 2005.

Kick-back - case-

The Federal Court has jurisdiction so-called kick- back procedure on closed-end funds in its decision of 20 January 2009, Az: XI ZR 510/ 07, declared applicable. The banks have a duty to disclose their self-interests in the sale of closed-end funds. This follows from the facts, because the banks an internal commission of 8 to 20% in the mediation of the offer closed-end funds - for example, the nominal value of the Fund - average demand.

Does the bank of this obligation of disclosure, the investor can make a claim for damages, provided that the damage to him is it originated. The limitation of these claims begins with the end of the year in which the investor has become aware that the bank has kept from him their commissions. You shall be three years.

That ruling - applicable to all closed-end funds, regardless of the legal form - also.

With a further judgment of 12 May 2009, the Federal Court has extended its so-called kick-back - case-law again. Now, apply that, " when a security services company its duty to educate the customer about reimbursements violated, it carries pleading and burden of proving that it did not act intentionally, even when its liability for negligence under § 37a WpHG is barred " (continuation of BGHZ 170, 226).

Ombudsman

Two specialized ombudsmen in Germany offer mediation in the complaints in connection with closed-end funds:

• Ombudsman Closed-end funds Closed-end funds of the association ombudsman eV in Berlin
• Ombudsman for investment funds of the BVI Bundesverband Investment und Asset Management in Berlin (excluding funds under the Investment Code)