The Bavarian state parliament passed a resolution on Wednesday to enable public and private foundations to invest up to 5% of their assets into venture capital.
Foundations in Germany have typically avoided investing in startups, which fall into a legal grey area.
Now Bavaria is in the process of creating a legal framework to make it possible for foundations — a largely untapped private capital source — to invest in what has typically been deemed a risky asset class: venture capital.
The move was welcomed by VCs such as Olaf Jacobi, managing partner at Capnamic Ventures. “Bavaria just set a powerful precedent for the rest of Germany and Europe — turning bold vision into concrete action by unlocking foundation capital for VC through smart, diversified strategies,” he tells Sifted.
“This milestone proves what’s possible when forward-thinking politics and the VC ecosystem work hand in hand toward a stronger future.”
Getting private capital into VC
Governments across Europe are making moves to try to increase the amount of private capital going into VC. In May this year, the UK’s largest pension funds pledged to invest £50bn into VC and infrastructure projects by 2030.
In Germany, the Christian Democratic Union has promised a number of measures to stimulate more private investment since taking office earlier this year. In its 146-page coalition agreement published in April, the government pledged to double the size of Germany’s flagship ‘Win-initiative’ — a plan to invest €12bn of public and private capital into the ecosystem — by 2030.
The European Investment Fund, the biggest investor into European VC, told Sifted recently that it too would like to see more “equity-friendly” regulations for major sources of private capital.
“For the big institutional investors — the pension funds and the insurers — the capital requirements imposed on them are so prohibitive that all the big words about getting in private capital really becomes very difficult when you see how they’re treated [with regards to] banking regulations and prevention rules,” Merete Clausen, the EIF’s deputy CEO, said.
Setting an example
Bavaria, a state in the south of Germany, appears to be taking matters into its own hands.
While German foundations — often set up by wealthy individuals and families, corporations or the public sector — are able to fund scientific research, there has been a historic lack of guidance in charitable and tax law about whether investing in startups aligns with the charitable mission of foundations. Traditionally, foundations have favoured investments in government bonds, real estate and blue-chip stocks than technology startups.
The Dieter Schwarz Foundation — a non-profit charitable foundation founded by former Lidl CEO Dieter Schwarz — is an example of a foundation that has increasingly made investments to further technology in Germany. The foundation invested in German AI startup Aleph Alpha’s €500m round in the form of a grant. It has also plugged significant cash into a new AI campus in Heilbronn, a city in southwest Germany.
Bavaria’s new legal framework, once completed, will enable foundations to invest in German and European VC funds via fund-of-funds. This will help reduce the risk for foundations: fund-of-funds invest in a broad range of venture funds, allowing the risk to be diversified.
There is currently no concrete timeline for when the legal framework will come into force, as there are some details yet to be ironed out.
First, the Bavarian government has to assess which public foundations — of which there are only between five and seven in Bavaria — could invest into venture capital. Then, they need to decide how they can do it, says Stefan Ebner, who co-initiated the plan to get capital from foundations into VC alongside Maximilian Böltl. Both are members of the Bavarian state party.
Another aspect to discuss is whether or not Bavarian startups should be given a special allocation by Bavarian funds, as Ebner and Böltl suggested in their original proposal.
“This is something that has to be discussed in detail because, of course, you do not want to have a lower return just because you are forced only to invest in funds which only invest in Bavarian companies. I think they do not even exist,” says Ebner. Though he adds that funds would still ideally consider investing in at least some Bavarian startups to maintain a “link” to the state.
Michael Brehm, general partner at Redstone, wrote on LinkedIn that the resolution is “completely changing the VC and startup game.”
“Instead of lecturing private companies to do more, Bavaria is taking action itself by enabling private players… This is more than a policy shift. It’s a strong signal.”
Ebner hopes that other states in Germany will follow Bavaria’s example as a way to mobilise more private capital in Germany.
“It is absolutely clear that the amounts that may be mobilised through this initiative are not that high, because the number of foundations from the state of Bavaria are not that high. So the thing that is much more important, and why we do this, is to enable private foundations to follow. And of course, other states in Germany as one step further,” he says.
“As the state of Bavaria, we create the starting point and ask the private foundations to follow us.”
With reporting by Sifted’s editor Amy Lewin
Update: This article was amended on July 25 to include comments from Bavarian state parliament member Stefan Ebner
Read the orginal article: https://sifted.eu/articles/bavaria-unlock-capital-foundations/
