GERMANY Law and Practice Contributed by: Carsten Berrar, Florian Späth and Heiko Blaut, Sullivan & Cromwell LLP
VC-backed exits have overall not concentrated on certain industries and remained subdued in 2024. Notably, there has been an increased exit activity in the healthcare sector in 2024 com - pared to 2023. The top five VC-backed exits by value in 2024 came from drug discovery (Car - dior), application software (Invia Group), mobil - ity (TIER) and business/productivity software (Aaron.ai and shyftplan).
Investors often receive co-decision rights through an investor advisory board, selected by the Managing LP from among significant inves - tors. This advisory board typically oversees, among other things, deviations from predefined investment criteria and extensions to investment timelines. An investment committee (IC) leads the deci - sion-making process, using various approval methods such as unanimous voting or a points- based system to ensure alignment with the firm’s investment objectives. This makes the IC the actual investment manager of the fund. Standard Documentation Limited partnership agreements cover key areas such as capital contributions, profit distributions, investment strategies, time horizons such as investment and liquidation periods and govern - ance (including GP and Managing LP rights). The terms may be tailored to the specific needs of LPs through side letters, which qualify as amendments to the limited partnership agree - ment. 2.2 Fund Economics The internationally established “2 and 20” fee model constitutes the default within the German VC industry. Management Fees and Carried Interest The management fee is an annual fee paid by the fund to the Managing LP for purposes of cover - ing administrative expenses and typically ranges from 2-2.5% of committed capital. It is charged every year the fund is in operation. Carried interest is the percentage of profits of an investment (typically 20%) allocable to the fund’s Managing LP. The Managing LP is entitled to carried interest once the fund has returned
2. Venture Capital Funds 2.1 Fund Structure
While Germany-incorporated VC funds do exist, neighbouring Luxembourg is more popular, with many sizeable Germany-focused VC investors due to its investor-friendly ecosystem, flexible corporate law and robust regulatory framework. When domiciled within Germany, the asset-man - aging GmbH & Co. KG (a partnership with a limit - ed liability company as the general partner (GP)) tends to be the preferred structure, owing to its fiscal benefits – in particular, its tax transparency and exemption from trade tax obligations. Structure When structuring funds as a GmbH & Co. KG, the separation of management and fund is man - datory. The initiators, together with the investors, participate as limited partners (LPs) without any additional payment obligations ( Nachschussp- flicht ). The GmbH serving as the fund’s GP is typi - cally excluded from owning fund assets, and its involvement in fund management activities is limited for tax reasons. Instead, fund manage - ment responsibilities (day-to-day administration) are assigned to a managing limited liability com - pany ( Kapitalverwaltungsgesellschaft , or KVG) (the “Managing LP” ).
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