KG & KS
MD MOSTAFA AZIZ SHAHEEN
PORT AND SHIPPING MANAGEMENT
BANGLADESH MARITIME UNIVERSITY
German KG System
• The KG model stands for Kommanditgesellschaft, a limited partnership structure where:
• Komplementär (General Partner): Usually a limited company (Bank), manages the business and has unlimited liability.
• Kommanditisten (Limited Partners): Contribute capital but have limited liability (up to their investment). Often informally
referred to as the “doctors and dentists”
• Developed to support German shipyards & the shipping industry
• In use for over 30 years
[email protected]• Primarily used for single-ship investment funds
• Purpose: Finance expensive ship assets through equity + debt
• Although the appeal of KGs for investors has evolved, currently all profits from the operation of the ship,
including capital gains from sales, are distributed to investors as dividends, with only German tonnage
tax being deducted.
• German government set the KG scheme requirements is that the ship managed by the KG must operate
out of Germany, thus bolstering local employment and strengthening the national shipping industry.
German KG System
Funding Composition Phases of a KG Fund
• Equity from investors: 35–50% • Creation – Legal setup of the KG
• Bank debt: 50–65% (secured by • Appraisal – Project evaluation and
ship mortgage) forecasting
[email protected]
• Investment backed by charter • Placement – Fundraising from
contracts private investors
• Fund dissolves once the ship is • Management – Operating the ship
sold and finances
• Closure – Ship sale and fund
termination
German KG System
Setting up a KG traditionally follows steps:
• The issuing house orders a ship from a shipyard after consultations with the general partner,
potential charterers, and managers (often related entities).
• The issuing house secures a bridging loan from a bank (typically German) to finance the ship’s
construction through staged payments.
[email protected]
• As delivery approaches and the project becomes more tangible, the issuing house raises the
necessary equity—usually 30% of the project cost—from investors.
This model successfully raised billions of dollars, making Germany the largest owner of container
ships globally. However, the financial crisis severely impacted the container ship market, leading to
significant losses for banks and issuing houses involved in KG schemes. With banks often advancing
payments before equity was raised, drops in ship values created untenable situations, rendering many
placement schemes ineffective and forcing banks to fund remaining installments to secure their loans.
German KG System
Pricing Model Inputs Asset Focus
• Ship price & age • Majority: Containerships
• Charter rate • Others: Tankers,
[email protected]
• Residual value multipurpose vessels
• Expected investor returns • Preference due to:
• Predictable returns from long-
• Determines: amount of term charters
capital, investor count, • Strong cargo demand (e.g.,
minimum investment China)
German KG System
Growth & Popularity Why It Declined
• Charter fleet growth began in 1994 • 2008 financial crisis hit global shipping.
• KG funds enabled easy vessel ordering and delivery
• Oversupply of ships and falling charter
• Attractive vs IPOs (simpler, tax-efficient) rates.
• 2004: Shipping KGs = 22% of all German private
fund investments • Many KG funds became insolvent, with
[email protected]
heavy losses for investors.
• 2006: First public KG-style fund – Marenave
Schiffahrts AG • Tax law changes and stricter investment
• Attractive tax breaks (especially depreciation regulations reduced appeal.
allowances).
• Stable returns from long-term charters.
• Asset-backed investment (ships as collateral).
• High domestic investor interest in Germany in the
1990s–2000s.
Project Overview:
Ship Name: MS Santa Bettina
German KG Example Type: Panamax container ship
Built by: A South Korean shipyard (e.g.,
Hyundai Heavy Industries)
Cost: ~USD 60 million
Charterer: Hamburg Süd (a major German
How the KG Model Was Used:
shipping company)
Charter: 10-year time charter at a fixed rate
1. Setting up the KG Structure
• A company called Santa Bettina GmbH & Co. KG was formed.
• The general partner (Komplementär) was a small management firm or subsidiary of a shipping
company. [email protected]
• The limited partners (Kommanditisten) were several hundred German retail investors.
2. Raising Capital
• Around €25 million was raised from limited partners (private investors).
• Investors were typically middle-class Germans looking for tax-advantaged income.
• The remaining €35 million was financed through a bank loan.
German KG Example
3. Operation
• The ship was built and delivered to Hamburg Süd, who paid a steady time charter hire.
• Income from the charter went to:
• Servicing the bank loan
[email protected] • Paying management and operating costs
• Distributing profit to investors
4. Tax Benefits
• Investors could depreciate their investment over 10–12 years, reducing their taxable income.
• In early years, this led to paper losses that were deductible from other income.
Objectives of KG Financing
• Support Capital-Intensive Ship Investments: The KG model facilitates large capital requirements for ship acquisitions by
blending equity from private investors with debt from banks—typically in a 1:2 equity-to-debt ratio.
• Provide Alternative to Traditional Bank Lending: KG financing offers off-balance sheet financing, making it an
attractive option compared to conventional ship mortgages, especially in volatile or capital-constrained markets.
• [email protected]
Leverage Tax Incentives to Attract Investors: It utilizes Germany’s favorable tax regime (tonnage tax) to incentivize
private investors, often allowing nearly tax-free returns, which enhances the attractiveness of maritime investments.
• Minimize Cost of Capital for Shipowners: By securing a substantial portion of the capital through private equity, often
without requiring shipowners to contribute much equity themselves, KG funds reduce the cost of capital and provide 100%
financing opportunities.
• Distribute Operational and Financial Risk: Most operational risks (e.g., opex, interest rate, currency risk, and residual
value risk) are shifted to the KG fund and its private investors, reducing exposure for the end user (charterer or ship
operator).
• Enable Business Expansion Without Balance Sheet Burden: Off-balance sheet treatment of vessels means shipowners
can improve gearing ratios and unlock equity from existing assets to invest in fleet expansion or modernization.
Must Reading
The development of a performance index for KG funds
and a comparison with other shipping-related indices
https://link.springer.com/article/10.1057/mel.2012.21
Norwegian KS
• KS (Kommandittselskap), which translates to Limited Partnership in
Norway. [email protected]
• It's a popular and tax-efficient structure for ship finance in Norway.
• KS is also a limited partnership but typically involves fewer investors
with larger stakes
• Allows individual investors to participate in ship ownership.
• Norwegian KS (Kommandittselskap), while similar to the German
KG, has recently resurged as a viable financing option after being
popular in the 1980s due to substantial tax benefit.
Norwegian KS
• A key distinction in KS financing is that equity is raised at the
project’s outset, often facilitated by a focus on financing secondhand
ships rather than new builds. [email protected]
• Another feature is the concept of uncalled capital; investors not only
contribute an initial investment (usually 15% of the project cost) but
also commit to a similar amount as uncalled capital, which remains
unutilized unless the project requires additional funding.
• Banks providing project financing often secure an assignment of this
uncalled capital, enhancing their security.
Structure of a Typical KS Financing
• Financial institution or specialized company.
Initiator/
• Structures the fund, identifies vessels, develops financial plans.
KS House • Often acts as or controls the General Partner.
• Limited Partners (Kommandittister): Individual investors
The KS Limited contributing most equity. Liability limited to their capital.
Partnership • General Partner (Komplementar): Has unlimited liability.
(Kommandittselskap) Responsible for management and operation of the KS (e.g., chartering,
maintenance). Must hold at least a 10% share in the KS.
[email protected] The Vessel • A specific newbuilding or secondhand ship acquired by the KS.
• Provides the majority of financing (e.g., 60-70% of
The Bank/Lender
cost) via a traditional ship mortgage loan.
• Often leases the vessel back from the KS
via a long-term bareboat charter
The Shipowner/Charterer
agreement, providing stable income to
the KS.
Typical Example: Real Example:
A KS syndicate decides to buy a Wilhelmsen, a large Norwegian
secondhand bulk carrier for $20 shipping group, used KS partnerships
million.Investors contribute $3 to finance ships in the 1980s–1990s.
million upfront (15%).
They sign to contribute $3 million They would act as general partner
more if needed (uncalled capital). and manage the ships.
[email protected]A Norwegian bank provides the Investors were attracted by the
remaining $14 million as a secured returns and tax benefits.
loan. When shipping demand dropped,
The ship is operated under a time several KS-backed ships became
charter for 7 years. unprofitable.
If the ship is sold later for $18
million, net profit is shared among
investors after settling the bank loan.
Similarities: KG vs. KS
Both the German KG (Kommanditgesellschaft) and Norwegian KS systems share core
characteristics as limited partnerships for ship finance.
Shared Foundations
Limited Partnership Structure: Both involve limited partners (investors) with limited liability
(up to their capital) and a general partner with unlimited liability.
[email protected]
Retail Investor Participation: They enable a broader range of individual investors to own
stakes in ships.
Historical Tax Incentives: Historically, both offered significant tax benefits (e.g., depreciation,
loss offsets) to attract investors, though these have evolved.
Single-Ship Ownership: Often structured to own a single vessel, isolating financial risk.
Sale and Leaseback: Frequently utilize sale and bareboat leaseback arrangements, where the
partnership buys a ship and leases it back to a shipping company for stable income.
Differences: KG vs. KS
Legal Basis & Focus
KG (Germany):
Governed by German partnership law.
Often involved a "GmbH & Co. KG" where a GmbH (limited liability company) was the general partner.
Historically known for very aggressive tax benefits for German investors, leading to a focus on tax optimization.
Primary driver for the German container fleet.
KS (Norway): [email protected]
Governed by the Norwegian Partnership Act.
General Partner (Komplementar) must hold a minimum 10% share and has unlimited liability.
While offering tax incentives, the focus might have been broader, including off-balance sheet financing for shipowners.
More broadly applied across various vessel types in Norway.
Evolution & Current Status
KG (Germany):
Traditional highly tax-driven model largely ended after the 2008 financial crisis due to widespread distress and losses.
Newer "KG 2.0" models are less tax-driven and more commercially focused.
KS (Norway):
While impacted by market cycles, the KS system has shown more resilience and continues to be a viable (though evolved)
financing option in Norway, often used for specific project financing.
[email protected]
