GERMANY Law and Practice Contributed by: Carsten Berrar, Florian Späth and Heiko Blaut, Sullivan & Cromwell LLP
the invested capital and a minimum, annually compounding interest rate (typically 6-8% pa – the “hurdle” rate) (distribution waterfall). How - ever, if carried interest is paid on a deal-by-deal basis or the Managing LP is otherwise entitled to advances on the carried interest, LPs typi - cally demand so-called claw-back provisions to address timing disparities/true-ups – pursuant to which carry beneficiaries are required to reim - burse LPs if the funds received by the Managing LP exceed targeted returns. 2.3 Fund Regulation In Germany, the regulatory framework for funds (including VC funds) is established by the Ger - man Investment Code ( Kapitalanlagegesetz- buch , or KAGB). For an entity to be recognised as an investment fund under the KAGB, it must meet certain structural criteria and be overseen by a licensed management company. Investment funds in Germany are categorised into Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs), which encompass all non-UCITS investment entities. VC funds typi - cally fall under the category of Special-AIFs, which are closed-end funds accessible only to professional and semi-professional investors, excluding retail investors. It remains to be seen what impact, if any, the general rise in European Long-Term Investment Funds (ELTIFs) will have on the VC industry and the composition of a funds’ limited partners. The Managing LP in an AIF (in the form of a capital management company (KVG)) requires authori - sation from the Federal Financial Supervisory Authority ( Bundesanstalt für Finanzdienstleis- tungsaufsicht , or BaFin) to operate. The KAGB provides for simplified regulation for “small” AIF-KVGs managing Special-AIFs below certain
asset management thresholds (which includes the fund structures relevant for VC investments). “small” AIF-KVG manages Special-AIFs with assets not exceeding either EUR100 million, including assets acquired through the use of leverage, or EUR500 million without leverage if there are no redemption rights for investors within five years of the fund’s first investment. German VC-fund KVGs tend to qualify for the exemption, primarily due to their non-reliance on leverage and their average fund size not exceed - ing the EUR100 million threshold. Such “small” AIF-KVGs are subject only to reg - istration, reporting, and specific financial state - ment obligations, as well as audit requirements. Only AIFs structured as limited liability entities or partnerships, where the general partner pos - sesses limited liability (eg, GmbH, AG, GmbH & Co. KG), are eligible for management under this framework. 2.4 Particularities Government-Backed VC Funds Government-backed VC funds receive signifi - cant public attention in Germany. The Growth Fund Germany ( Wachstumsfonds Deutschland ), which achieved its EUR1 billion target volume in 2023, is a fund-of-fund that invests in Ger - man and international VC funds. It is one of the largest German government-backed VC funds, with the government providing approximately EUR350 million alongside institutional investors, such as Allianz, Signal Iduna and BlackRock. It is coordinated by KfW Capital – the investment subsidiary of the government-affiliated KfW development bank. As of the end of 2024, the Growth Fund Germany has already committed more than half of its target volume (EUR567 mil - lion) to 29 VC funds.
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