The new attempt in Berlin to mobilise venture and innovation capital in Germany is entering the final stage. Flanked by leading financial market players, the Chancellery, the Federal Ministry of Finance and the Federal Ministry of Economics have reached a basic agreement on the main points on how to get more capital flowing into the economy. The Federal Government's start-up commissioner, Anna Christmann (Green Party), announced at a conference organised by the Federation of German Industries (BDI) at the beginning of May that the German government will soon be ready to present concrete proposals.

Finance Minister Christian Lindner (FDP) initiated the project at the beginning of the year. It is called the WIN Initiative. Lindner looked towards France, having noted that, with the same level of regulation, more private equity and venture capital is raised there than here in Germany. His conclusion – the framework conditions in Germany need to be changed. Funding rounds in Germany have been very slow.

France launched the Tibi initiative in 2020, which has no less an objective than to finance the „Fourth Industrial Revolution“. Philippe Tibi is a professor of economics at the renowned École Polytechnique. In a study, he identified the insufficient financial resources for technology companies in later growth phases. President Emmanuel Macron called on the country's institutional investors to invest 6 billion euros in the sector over three years. The initiative has now reached phase 2, in which more and more investors are joining in. There are currently 35.

Most of the capital in Germany has so far come from foreign investors. A comprehensive and sophisticated set of financial support instruments already exists. These are the responsibility of Federal Economics Minister Robert Habeck (Greens). However, according to the industry association BDI, growth companies in key technologies and the deep tech sector needs more support.

The investment cycles in these sectors are longer. Investors need more patience. „We see that venture capital continues to shy away from investing in later growth phases, and in technologies that require a lot of patience and capital," Klaus Deutsch, Head of Research, Industrial and Economic Policy at the BDI, told Börsen-Zeitung. ‘The financing ecosystem for innovations needs much more capital in order to not only finance the big ideas, but also to be able to successfully utilise them in sales channels. Only then will there be a sustained impact.

The WIN working group's government advisors from the financial markets come from the executive floors. Stefan Wintels, Chairman of the KfW Executive Board, coordinates them. Among them are Christian Sewing for Deutsche Bank, and Oliver Bäte for Allianz. But Deutsche Börse and, according to reports, Munich Re, Bayerische Versorgungskammer, Blackrock and DekaBank are also involved. The group of experts analysed the shortcomings in innovation and growth capital under four different aspects, according to information made available to Börsen-Zeitung. These are investable assets, structures and vehicles, the investments themselves, and the exit. In addition, the legal framework for taxes and supervision was scrutinised.

Over the course of the process, the working group discussed ten key measures. Which of these are politically feasible should become clear in the near future. Lindner's office has so far remained silent. „The Federal Ministry of Finance is continuously working on measures to strengthen the financial centre,’ explained a spokeswoman in response to an inquiry. For this purpose, the ministry is also in dialogue with market participants such as those of the WIN initiative. At the BDI symposium, Christmann had reported on the advanced considerations to set up a Growth Fund II as a successor model for institutional investors. This is one of the ten points on the expert group's agenda. The current ‘Growth Fund Germany“ is managed by KfW and, according to KfW, is one of the largest VC funds in Europe with a target volume of 1 billion euros. The fund is mainly fuelled by private capital from more than 20 major institutional investors – insurers, pension funds, foundations, asset managers and large family offices. Anchor investors are the German government and KfW Capital.

The BDI recently called for an innovation and growth fund specifically for key technologies. The industry already has experience with previous funding activities for more venture capital in core areas. After around three years, investments measured in terms of GDP are still significantly lower than in the USA and Asia – and also lower than in France and the UK, said Deutsch at the BDI. „We must be prepared to further develop our ecosystem.“

Various proposals from the expert group aim to mobilise more private money for VC. For institutional investors, the investment regulations could become more flexible by increasing the maximum venture capital investment and participation quota. At banks and asset managers, money from wealthy clients could be channelled into the VC sector via newly established feeder vehicles. These financial instruments would have the opportunity to invest in Growth Fund II, for example. Finally, public capital collection centres should invest more in VC. This is likely to play a political role in funded pension schemes, the so-called generation capital.

The German Private Equity and Venture Capital Association (BVK) is pushing for a functioning exit market in Germany. The WIN expert group has analysed the fungibility of VC funds and exit opportunities. A secondary market platform that brings buyers and sellers together could make the asset class more liquid. A nominal value of just one cent for shares could provide more leeway for exits via the stock exchange. In addition, valuations for capital increases could be set more flexibly.

There are also hopes for tax regulations. Ulrike Hinrichs, Managing Director of the BVK, is calling for legal clarification following the great uncertainty caused by the tax authorities in some federal states, particularly in the private equity (PE) sector. According to an old tax administration letter from the Federal Ministry of Finance, VC and PE are asset management investments for the federal states and are taxed accordingly. However, some tax authorities categorise them as commercial. Public prosecutors are investigating numerous cases. According to Hinrichs, the definition of asset management urgently needs to be incorporated into the law. There might be some movement in Berlin: „As part of the WIN initiative, companies have also made tax law proposals that affect the BMF circular on the taxation of private equity funds," said a Ministry spokeswoman. ‘We are examining these intensively - also in cooperation with the federal states.“