German venture capitalists given incentives, no buyout law forthcoming

Industry figures have cautiously welcomed changes in the German tax law to benefit venture capital. However, buyouts remain outside this legislation’s scope, allowing critics to bracket them alongside hedge funds.

The German cabinet has passed measures to improve the legal conditions for venture capitalists in the country, although the legal status of larger private equity firms remains unstable in the country.

After being passed by the German executive, the measures will need to be sanctioned by the legislative chambers the Bundestag and the Bundesrat.

The law will provide venture capital firms with portfolio companies of below €20 million ($27 million) in equity capital with tax breaks to protect the companies from changes in the German corporate law and reinforce their legal status. The €20 million figure is an increase from €500,000 last spring to take into account the concerns of industry figures that the definition of venture capitalism was too narrow.

Daniela Weber-Rey, a partner at law firm Clifford Chance, said: “The law is much better than could have been hoped for last spring, and it provides a good platform for a future broader private equity law as it has been well drafted.”

However, she was highly critical of the presence of investment law specifically targeted at hedge funds and activist investors in the draft legislation for venture capitalism. “The Ministry of Finance controlled by the Social Democrats has deliberately confused private equity and hedge funds for political reasons hoping to increase its chance of winning votes on the back of the irrational locust debate,” she said.

Hedge funds were openly attacked by German vice-chancellor Franz Müntefering who accused them of being locusts. The media and public opinion in the country subsequently bracketed private equity with the activist investors.  According to news agency Bloomberg Social Democrat finance minister Peer Steinbrueck publicly told a meeting of his party in Berlin on June 20: “I will ensure that tax breaks go to venture capital only”.

Due to such staunch opposition the current legislation has been greeted as a positive first step by the industry. Doerte Hoeppner, managing director of the German industry body BVK, said: “We don’t have a private equity law for Germany but at least now we have one for venture capital.” Without a firm private equity law the industry has less chance to grow in Germany, as investors will choose to be based outside of the country where they have clearer and more favourable tax advantages, she said.

Figures compiled by European industry body the European Venture Capital Association show that the domestic German private equity industry had received €3.6 billion invested by private equity firms with office in Germany in 2006 in comparison to €41 billion in the UK.