Funding Solutions for GP Commitments in the German Market – with a Particular Focus on Defense Tech and Dual-Use Funds

August 28, 2026

Key Takeaways

The market for GP funding solutions in the German and European space offers a wide range of instruments that enable GPs to finance their commitment even with little or no equity of their own. The choice of the appropriate instrument depends significantly on the GP's situation, track record and fund strategy.
Defense tech and dual-use funds are subject to considerable additional regulatory requirements that may restrict the pool of available funding partners and increase the complexity of structuring the financing. In particular, FDI screening, export control and classified information protection requirements necessitate early and careful planning.
The current geopolitical landscape and the associated increase in European defense spending are creating a favorable market environment for defense tech funds. GPs operating in this sector should not, however, underestimate the regulatory challenges and should plan accordingly.

Financing the GP commitment is one of the central challenges when launching a private equity or venture capital fund. This is particularly true for General Partners who have little or no equity of their own. This OnPoint provides a comprehensive overview of the funding solutions available in the German and European markets and additionally examines the particular legal, regulatory and practical requirements that arise for funds and GPs specializing in the defense technology and dual-use sectors – an area that has gained considerable significance in light of the current geopolitical landscape and the recent strategic shift announced by Federal Minister for Economic Affairs and Energy Katherina Reiche in her new start-up strategy, pursuant to which the German federal government would be enabled to invest directly in defense start-ups.

Background: The Problem

The General Partner commitment – typically in the range of 1–3% of the fund’s total commitments, and sometimes up to 5% – serves a clear structural purpose: it ensures that the fund manager and the individuals acting on its behalf put their own capital at risk, thereby aligning incentives with the Limited Partners. This principle of “skin in the game” is deeply embedded in the private equity and venture capital market. The ILPA Principles 3.0 (2019), the leading industry guidance published by the Institutional Limited Partners Association, expressly recommend that fund managers should contribute a substantial equity interest in the fund in cash, rather than relying on management fee waivers or specialized financing facilities as a substitute. While this recommendation sets the benchmark for LP expectations, the reality – particularly for smaller, newly established or first-time GPs – is that a purely cash-funded commitment is often not feasible. It is this tension between the market’s expectation of genuine capital at risk and the practical constraints faced by many GPs that has driven the development of the funding solutions outlined below.General Funding Solutions at a Glance

1. GP Commitment Financing (Direct Loan)

Specialized lenders offer the GP a secured loan to finance the commitment. This form of financing has established itself as one of the most common solutions in the market and is offered by both banks and specialized non-bank lenders. The key structural features are as follows:

Security: Typically against the GP's future carried interest claims and/or the GP's LP shares in the fund.
Repayment: From fund distributions (capital returns and carried interest).
Term: Aligned with the fund's term (typically 8–12 years).
The German market is smaller than the Anglo-Saxon market with regard to providers of these solutions; specialized GP financing providers frequently operate from London or Luxembourg.

2. Carried Interest Monetization / Advance

Here, the unrealized (future) carried interest is used as the basis for an advance payment or credit facility. This solution has gained considerable popularity in recent years, as it enables GPs to leverage the economic value of their track record without relinquishing ownership interests in the management company:

The lender receives a share of the carried interest as collateral or direct consideration.
Particularly relevant for GPs with a track record from previous funds who already have unrealized or realized carried interest.

3. Management Fee Line / Subscription Line

Some banks offer the GP a short-term credit line secured by future management fees. This structure is particularly suitable as bridge financing to meet the commitment during the fundraising phase, before management fees from the new fund begin to flow:

Suitable for GPs with an established stream of management fees from existing funds.
Typically structured as a revolving credit facility.
Less suitable for first-time managers without existing funds.

4. GP Stakes / GP-Level Equity Investment

An external investor acquires a minority stake in the GP or the management company, thereby providing equity capital that can be used, among other things, to fund the commitment. The GP stakes market has developed into a distinct segment in recent years, with transaction volumes steadily increasing:

In doing so, the GP relinquishes part of its economic rights (management fees, carried interest).
Advantage: No debt structure; strengthens the entire GP platform.
Disadvantage: Significant dilution and often complex to negotiate.

5. Co-investment by LPs ("Evergreen GP Commitment")

Individual strategic LPs provide the commitment to the GP directly or indirectly. This solution is increasingly discussed as a pragmatic approach, particularly for funds with a specialized investment strategy where certain LPs have a strategic interest in the fund's launch:

An LP effectively assumes part of the GP's commitment in return for certain benefits (e.g. preferential co-investment rights, reduced fees).
Must be carefully structured from a legal and regulatory perspective to preserve the GP's independence and comply with Alternative Investment Fund Managers Directive (AIFMD) requirements.
Increasingly discussed in the German market among institutional LPs (insurance companies, pension funds), but complex to implement.

6. Personal Loans to Fund Managers / Partners

In smaller structures, the managing partners take out personal loans (e.g. from their own banks or family offices), which they then contribute as equity to the GP. This solution is quite widespread in practice, particularly among first-time managers:

Simplest solution, but dependent on personal creditworthiness.
May offer tax advantages (interest deduction at personal level).
Problematic for larger amounts.

7. Preferred Equity Structures / Hybrid Solutions

Some providers and specialized credit funds offer structures that lie between equity and debt. These hybrid instruments have the advantage that they may be treated differently from a balance sheet and regulatory perspective compared with traditional loans, while also enabling a flexible repayment structure:

Preferred return structures, in which the lender receives a preferential share of fund distributions.
Not a traditional debt relationship, but an economic interest.
Flexible repayment from fund distributions.

Specific Challenges in the German Market

Aspect	Relevance
Regulation (AIFMD / German Capital Investment Code (KAGB))	The structure must comply with the applicable KAGB regime; the collateralization of the GP's fund interests or carried interest entitlements as security for GP commitment financing raises complex questions under German civil and commercial law, including consent requirements under the limited partnership agreement (LPA) and applicable transfer and assignment provisions.
Tax structuring	Carried interest taxation in Germany is complex (partial income procedure, Investment Tax Act); influences the attractiveness of carry-secured structures
Market depth	The German market is smaller than the Anglo-Saxon market; specialized GP financing providers often operate from London or Luxembourg
First-time managers	Have significantly more difficulty accessing GP financing as they lack a track record

Defense Tech and Dual-Use: Particular Requirements for GP Funding Solutions

The geopolitical sea change – in particular Russia's war of aggression against Ukraine, growing tensions in the Indo-Pacific region and the intensified European debate on strategic autonomy – has led to a significant increase in investor interest in defense technology and dual-use technologies. The recent strategic shift announced by Federal Minister for Economic Affairs and Energy Katherina Reiche in her new start-up strategy, pursuant to which the German federal government is to be enabled to invest directly in defense start-ups, is also expected to further boost the interest of domestic and foreign investors in the German defense sector. Funds specializing in this sector face particular challenges when structuring their GP commitments and selecting appropriate funding solutions that go beyond the general considerations outlined above.

Current Market Developments

The European defense tech market has experienced unprecedented momentum in 2024–2026. Several specialized funds have been launched or are in the process of fundraising, including funds focused on cybersecurity, autonomous systems, space technology, communications technology and conventional defense technology.

The European Commission has established the European Defense Industrial Programme (EDIP) as a binding EU legal framework for 2025–2027 through Regulation (EU) 2025/2643 of 16 December 2025, with a budget of €1.5 billion. The first work program was adopted on 30 March 2026 and includes, among other things, €100 million in equity support for defense start-ups through the FAST fund (Fund Accelerating Defense Supply Chains Transformation). Together with the European Defense Fund (EDF), these instruments are acting as catalysts for private investment. At the same time, several European states – including Germany with its Sondervermögen Bundeswehr (special defense fund) and the Sondervermögen Infrastruktur und Klimaneutralität (special infrastructure fund of up to €500 billion) established in September 2025 – have significantly increased their defense and infrastructure spending, further boosting demand for innovative defense tech solutions.

On the investor side, there is an increasing willingness among institutional investors to invest in defense tech funds. While environmental, social and governance (ESG) concerns were previously often regarded as an obstacle, perceptions have shifted: defense and security are increasingly viewed as prerequisites for maintaining democratic values and thus as ESG-compatible. Nevertheless, certain institutional investors – particularly some pension funds and faith-based investors – continue to maintain restrictions on investments in the defense sector.

Legal and Regulatory Considerations for Defense Tech and Dual-Use Funds

Funds and GPs specializing in the defense tech and dual-use sectors must take into account a number of additional legal and regulatory requirements when structuring their funding solutions. These requirements can have significant implications for the availability and design of individual financing instruments:

(a) Foreign Direct Investment (FDI) Screening and Investment Control: The participation of foreign investors – whether as lenders, GP stakes investors or LP commitment providers – can be expected to attract significant scrutiny in the defense and dual-use sectors. In Germany, the Foreign Trade and Payments Act (Außenwirtschaftsgesetz – AWG) in conjunction with the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV) governs the foreign investment review of corporate acquisitions. For GP funding solutions, this means that the German government may closely review situations where a foreign lender or investor obtains influence over defense-relevant portfolio companies through a GP stakes transaction or carried interest collateralization.

(b) EU FDI Screening Regulation: At the European level, the new Regulation (EU) 2026/1386 of 17 June 2026 on the screening of foreign investments in the Union has repealed the previous Regulation (EU) 2019/452 and significantly strengthened the regulatory framework. The new Regulation requires all Member States to establish an FDI screening mechanism, harmonizes the minimum requirements for review procedures (including an initial review period of 45 calendar days) and, for the first time, extends its scope to intra-EU investments made through EU subsidiaries. It also establishes a minimum sectoral scope for screening, covering in particular critical technologies, defense goods and supply chain resilience. Member States must adapt their national rules within 18 months of the Regulation’s entry into force.

(c) Export Control and Dual-Use Regulation: The EU Dual-Use Regulation (EU) 2021/821, whose control list in Annex I was most recently updated by Delegated Regulation (EU) 2025/2003 of 8 September 2025 (in particular adding new controls for quantum technology, semiconductors and advanced manufacturing technologies), and the German War Weapons Control Act (Kriegswaffenkontrollgesetz – KrWaffKontrG) may indirectly affect the funding structure. Where a GP or its portfolio companies develop or distribute goods or technologies subject to export controls, certain investor groups – particularly those with links to sanctioned jurisdictions – may be excluded as funding partners. This narrows the pool of potential lenders and GP stakes investors and requires thorough know-your-customer (KYC) and sanctions screening procedures.

(d) Security Clearances and Classified Information Protection: Portfolio companies in the defense sector are frequently subject to the Security Clearance Act (Sicherheitsüberprüfungsgesetz – SÜG) and the classified information protection requirements of the competent federal ministry. Changes to the GP's shareholder structure – for example through a GP stakes transaction – may necessitate renewed security clearance checks for the individuals and entities involved. This can significantly increase the timeframe and complexity of certain funding solutions.

(e) NATO and Allied Requirements: For portfolio companies participating in NATO programs or bilateral defense cooperation arrangements, additional requirements may apply regarding ownership structure and the origin of capital. In particular, US ITAR regulations (International Traffic in Arms Regulations) and CFIUS requirements (Committee on Foreign Investment in the United States) may become relevant where portfolio companies use US technology or are integrated into the US supply chain.

(f) ESG Regulation and EU Taxonomy: The Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation present particular challenges for defense tech funds in terms of classification and disclosure. The European Commission published a proposal for a revised SFDR in November 2025 (known as SFDR 2.0), which introduces a three-category system for sustainability-related financial products (“Sustainable,” “Transition,” “ESG Basics”) and largely eliminates entity-level disclosures. The Council agreed its negotiating position on 24 June 2026; trilogue negotiations are expected to commence in late 2026. While defense investments are not inherently taxonomy-harmful, considerable uncertainties remain regarding the classification of certain weapons systems and dual-use technologies. This may influence the willingness of certain institutional investors and lenders to act as funding partners and requires careful alignment of the fund documentation.

Impact on Individual Funding Solutions

The aforementioned regulatory considerations have concrete implications for the availability and design of individual funding solutions for defense tech and dual-use funds:

GP Commitment Financing: Collateralization through carried interest claims and fund interests is in principle also available for defense tech funds, but requires careful examination of whether the granting of security could result in the lender obtaining indirect influence over security-relevant portfolio companies. In practice, additional covenants are frequently agreed to ensure that the lender does not acquire operational control rights over defense-relevant assets in an enforcement scenario.

GP Stakes: This form of financing is particularly sensitive in the defense tech sector, as the acquisition of a minority stake in the GP may establish indirect influence over portfolio companies. An FDI review is required in many cases, particularly where the GP stakes investor is domiciled outside the EU/EEA. In practice, this has led defense tech GPs to preferentially seek European or NATO-allied GP stakes investors.

Co-investment by LPs: In the defense tech sector, the participation of certain LPs in the GP commitment may trigger additional regulatory reviews, particularly where the LP is attributable to a state or state-related entity. Sovereign wealth funds from certain jurisdictions may be excluded as funding partners or may trigger significant regulatory hurdles.

Carried Interest Monetization: This solution is in principle well suited to defense tech GPs, as it does not require any change to the GP's ownership structure. However, it must be ensured that the assignment or pledging of carried interest claims does not lead to an impermissible disclosure of confidential information regarding defense-relevant portfolio companies.

Practical Guidance for Defense Tech and Dual-Use GPs

Early Regulatory Analysis: GPs should, with the involvement of legal advisers with expertise in foreign trade law, export control and defense regulation, conduct a comprehensive regulatory analysis during the fund's conceptual phase to understand the implications of the investment strategy for the available funding solutions.

Careful Selection of the Investor Base: The origin and structure of funding partners should be reviewed for regulatory compatibility at an early stage. Investors from NATO and EU states are generally less problematic than those from third countries. Robust KYC and sanctions screening procedures are essential.

Tailored Fund Documentation: The fund documentation (limited partnership agreement (LPA), side letters, subscription agreements) should contain specific provisions addressing the particular regulatory requirements of the defense tech sector, including information barriers, transfer restrictions and investor compliance obligations.

Preference for Non-Dilutive Structures: Given the regulatory sensitivity of ownership changes in the defense sector, GPs should favor funding solutions that do not require changes to the GP's ownership structure – in particular GP commitment financing, carried interest monetization and management fee lines. GP stakes transactions remain possible but entail considerable additional regulatory complexity.