The German KG model is a successful instrument of project finance for various asset classes (aircraft financing, ships, real estate, renewable energy etc.) and tax arrangements. The letters â€śKGâ€ť refer to the German word â€śKommanditgesellschaftâ€ť which translates literally to â€śLimited Partnershipâ€ť. The German KG model is a form of limited partnership in which limited partners provide the equity for asset investment.
In the 1970â€™s the German KG model was established to raise private equity for the financing of projects. To raise the necessary funds, initiators set up a legal entity (an SPC) and then syndicate the equity among individuals as private investors. The investors realised significant tax benefits, mainly from book losses exceeding their investment amount, plus an annual dividend payment as return on investment. Over the years the tax benefits have been reduced by the government and finally have disappeared almost completely so that KG investments are no longer tax driven. The main focus now is the return on investment.
Typically in a KG investment, the Managing Partner will purchase a revenue producing asset with a combination of long term debt â€śLong Term Debtâ€ť and short term debt â€śEquity Bridge Loanâ€ť or â€śEquityâ€ť. After the asset is purchased, the Equity portion of the financing is sold to investors such that the investors own the Equity. This process is called â€śEquity Syndicationâ€ť or â€śSyndicationâ€ť. Generally the minimum subscription amount by an investor is 10,000 Euro and above.
Since its origin in the 1970s, the German KG Model has significantly increased its annual volume and value of transactions. By the end of 2008, the KG-funds had completed aggregated investments amounting to about EUR 400 billion. As with other investment forms, the KG-Funds were also hit by the financial turmoil in the last few years. One of the strongest asset classes were aircraft funds. In 2010 the market recovered slightly, with a syndicated equity amount of EUR 5.8 billion which triggered investments of EUR 10.8 billion. Aircraft funds have syndicated equity in the amount of more than EUR 700 Mio. in 2008 and the aviation sector has been relatively stable over the last few years.
The legal environment for KG-funds has changed significantly with respect to the applicable tax law and regulation. Financial supervision of the funds prospectuses used for the equity placement is being carried out by a supreme federal authority (BaFin). From July 1, 2005 onwards, BaFin examines the prospectuses of closed-end funds. The prospectus must contain all the material information needed to make a qualified investment decision.
The KG-Fund has a special feature: It is a closed-end fund with a long-term investment, usually 5 to 15 years. In the past 10 years, the KG-investors have received an annual cash payment of 7% p.a. on average.