TYPICAL OR ATYPICAL SILENT PARTICIPATION

Silent partnerships are a form of mezzanine financing that is – depending on their structure – either closely akin to equity or debt. They are particularly common in Germany, though similar forms exist in other countries (the following description is based primarily on the German understanding!). In a silent partnership, the silent partner provides capital without taking on a management or supervisory role and without becoming a formal shareholder. This means there is no need for registration in the commercial register or changes to the company’s articles of association, making it simpler and less expensive to implement than traditional equity participation. A key advantage of silent partnerships is their flexibility: they can be structured to function more like debt or more like equity, depending on the needs of the business and the investor and the specific terms of the agreement.

Silent partnerships are further classified as typical and atypical:

• The typical silent partnership is typically accounted for as debt capital because, unlike the atypical silent partnership, investors do not bear any "co-entrepreneurial risk". This means they are not involved in covering losses and do not participate in any hidden reserves or increases in the company’s value. Typically, silent partners in this structure also do not have significant decision-making rights but can be granted certain approval rights, e.g. when taking on a new silent partner.
• The atypical silent partnership goes a step further by including participation in the company’s asset growth, which compensates for the fact that these partners also share in the company’s losses – giving it a more equity-like character. Typically, these partnerships are non-voting, but offer considerable freedom for structuring: it can include or exclude buyback obligations by the company, approval rights, other interference rights, or red lines.
• Both typical and atypical silent partnerships include a profit participation component. Where needed, this can be complemented by a fixed component – allowing for a structure that combines a steady interest payment with a variable, profit-based return.
• Be aware that the accounting treatment of silent partnerships ultimately depends on their specific structure. And while they usually can be clearly classified on the balance sheet, banks, financial institutions, or state funding bodies may interpret their economic classification differently. Make sure to check in with your lawyer and financial or tax advisor early in the process to determine its classification.
• Also, be aware that silent partnerships may have jurisdiction-specific requirements. For example, in Germany, a silent partnership must demonstrate a “shared purpose” between the company and the investor to qualify.