Recently, the Company Appeals Board decided to reject the FSA's narrow case law concerning exemptions when calculating leverage in alternative investment funds.

The FSA had rejected a request for registration of a property fund as a self-managing alternative investment fund as the underlying property companies applied leverage (loans on properties). The property funds did not apply gearing and was not liable for the underlying companies’ debt. However, the FSA was of the opinion that the property fund applied leverage via the property companies, and that the property fund was therefore to be assessed according to the threshold value of Euro 100 million. Consequently, the property fund was to obtain a licence as a self-managing alternative investment fund.  

According to the basis of the regulation of fund managers of alternative investment funds, a fund applies leverage even if the debt is only recognised in companies under the fund. Article 6 (3), 2nd sentence of the Level II regulation (231/2013), specified, however, an exemption to the main rule specifying that alternative investment funds whose core investment policy is to acquire control of non-listed companies are not to include in the calculation of the leverage any exposure that exists at the level of those non-listed companies. This applies, however, only if the alternative investment fund is not to bear potential losses that extend beyond the alternative investment fund’s - typically the equity - investment in the company in question.

Due to the provision’s reference to the acquisition of control of non-listed companies, it has been the practice of the FSA that it only aimed at private equity and venture capital funds whose core investment policies are to acquire control over non-listed companies. But there has been doubt as to whether the provision could also be applied by other types of funds, including, for instance, property funds which typically purchase and sell properties via 100 % owned companies.


In the decision, the Company Appeals Board emphasises that the wording of the provision does not authorise that the exemption shall only apply to private equity and venture capital funds, and other funds, including property funds, may therefore apply the exemption.

The Company Appeals Board found that the alternative investment fund was covered by the exemption of the regulation. The total assets managed did therefore not exceed the threshold value of Euro 500 million for non-leveraged funds with the effect that a request for registration and not a licence was only to be filed. The FSA was therefore not entitled to reject the alternative investment fund’s request for registration with reference to the fact that the fund had applied leverage.

The notable importance of the decision is that an existing or new property fund, which only applies leverage in its underlying, 100 % owned property companies/portfolio companies, and where no investors in the funds are entitled to be redeemed within a period of minimum five years after the date of the original investment, must assess the requirement for a licence in the Act on alternative investment fund managers etc. against the threshold value of Euro 500 million and not only Euro 100 million.


Claus Bennetsen

Partner (L)