April 14, 2020

Can the fund provide collateral for the portfolio companies?

Typically, the fund documentation provides for strict restrictions or even a prohibition for funds to provide collateral for portfolio companies' debts.

Even if this is not the case, the tax status of German funds and funds with German LPs must be taken into account. A fund operating as a non-trading partnership (vermögensverwaltende Personengesellschaft) may become a trading business (Gewerbebetrieb) by providing collateral for portfolio companies' debts. Alternative structures, such as equity commitment letters or deferred loans may be preferable in such case.