Pending law worries German buyout funds

The German government’s latest draft of a new private equity law is good news for venture capitalists but does nothing for late stage investors.

Germany’s Ministry of Finance has published a revised draft of a pending law on private equity aimed at improving conditions for early-stage investors operating in the country. While venture capitalists stand to benefit if the law is implemented, late-stage investors and buyout funds domiciled in Germany do not.

Under the law, the government will put in place fiscal incentives for German venture capital funds investing in small companies that are less then 10 years old and have less than €20 million of equity capital. An earlier draft had limited the availability of tax breaks for early-stage investors to funds backing businesses capitalised at less than €500,000.

The draft also provides clarity on the tax status of the management companies of venture capital funds, classifying them as asset managers rather than operating companies and thus freeing them from trade tax liability.

Funds investing in businesses whose share capital is worth more than €20 million will not qualify for the stipulated benefits.

The German Venture Capital and Private Equity Association (BVK) in Berlin welcomed the changes as “an improvement” for investment funds specialising in seed financing. 

However, the BVK also said the new draft was a “missed opportunity” in that it did not provide similar arrangements for the whole of German private equity.  “Unfortunately the draft focuses on a relatively small part of the industry only. There is still an opportunity for the coalition government to create a stable and internationally competitive framework for the whole of the private equity industry in Germany,” the BVK said in a statement.  

According to industry practitioners, the Finance Ministry’s refusal to promote German buyout funds is the result of a political compromise between the country’s two governing parties.

In late May, the Finance Ministry introduced an additional concern for the industry by announcing plans to require private equity funds based in Germany to pay value-added tax on the management fees they receive – an additional cost to domestic managers. This rule would be unique in Europe. “It is difficult to see why the Ministry of Finance would hand such a significant advantage to fund managers abroad. At the very least, we should be entitled to a level playing field,” protested the BVK in a statement on June 8.

It is felt that the government’s position on buyout funds in Germany is in part driven by a desire to reign in LBO investment activity in Germany. However, the bulk of buyout funds consummating large investments in the country are not domiciled in Germany and hence will not be affected by any legal modifications.

Last week the BVK announced the decision of ten LBO groups to be the founding members of a large buyout lobbying group within the association. Out of the ten, Allianz Capital Partners is the only Germany-based member of the group.

Germany’s new rules on private equity are expected to become law later this year. The BVK said it would continue to lobby for amendments in favour of late-stage investment funds.