Bildnachweis: AVEGA Capital Management.
Observers of the political landscape in Germany saw a glimpse of light last year:
leading policymakers alongside limited partners signed the ‘WIN’ initiative with
the intent of strengthening the start-up landscape. Despite the collapse of the
government, industry associations remain grateful for the acknowledgment that a
strong ecosystem requires a favourable legal framework, structures, and vehicles.
The logical fundraising vehicle of choice for a German venture capital investor focusing on the local start-up market has always been the flexible domestic limited partnership (‘GmbH & Co. KG’). Since 2013, those partnerships would generally qualify as Alternative Investment Funds requiring an Alternative Investment Fund Manager (‘AIFM’). Thanks to a combination of simplification thresholds and accounting standards, most managers would operate as ‘registered’ (‘sub-threshold’) rather than ‘authorized’ AIFM, saving significant compliance overhead. With the widely adopted designation ‘EuVECA’, those funds can even be marketed outside Germany.
Room for improvement?
In discussions with venture capitalists and growth investors, three recurring themes keep popping up:
(Cost of) Compliance
Whilst the ‘registered’ regime is supposed to keep the compliance burden for smaller managers low, there appears to be an increased ‘compliance scope creep’ – legislation that has been passed recently and BaFin practice that has emerged seldom has the easy life of a venture capitalist’s COO/CFO in mind. ESG-centric regulation such as SFDR may sound like a thing in the past in today’s political climate but is not set to go away quickly. Anti-money laundering measures also do not play easy on small managers. Luckily, DORA scopes out registered AIFMs, for now.
Tax
The industry partied when the VAT exemption on management fees was finally rolled out to all funds. But questionable interpretations of EU-wide VAT exemptions were only one of the many issues that the German venture capital industry is facing. Since day one, a debate about whether the partnerships realize trading income emerged, and views that were thought to be agreed between the industry and the tax administration are constantly being rediscussed, fuelled by some federal states’ hardliner positions. This is particularly frustrating for venture capitalists looking to convince international LPs to invest in German vehicles as it might trigger LP tax-filing requirements.
Size
Sometimes it is just their own success (or: inflation) that pushes managers into an authorization regime when their total assets under management cross EUR 500 million. Obtaining manager authorization is not a straight-forward exercise at all, partially due to the BaFin’s lack of experience with authorized venture capital managers.
Modern setup
A future-proof venture capital fund setup would be one where all pieces fall into place: flexible light-weight vehicles paired with a robust AIFM setup, favourable tax environment, absence of regulatory ‘gold-plating’, and an array of expert service providers to choose from. GPs no longer need to choose between Germany and Luxembourg – they can combine both. Choosing a fund administrator from overseas has always been a choice; the next logical step could be the appointment of a third-party AIFM allowing for a quick ‘upgrade’ of the structure without the requirement for a lengthy approval process with the BaFin, essentially transferring all compliance obligations, while keeping the existing infrastructure and vehicles. Foreign third-party managed funds can be added to the mix as feeder vehicles to broaden the LP base with international investors, provided that tax considerations are carefully managed. In the end, Germany’s venture capital scene will thrive not solo, but with smart reforms, and maybe with a little help from its smaller neighbour.
About the author:
Nic Müller is co-founder and CEO of ACM Private Markets, an independent third-party AIFM based in Luxembourg and Frankfurt. He is co-host of the ‘Long Lunch Podcast’ on private markets.
