Initial Public Offerings and Venture Capital in Germany



more comprehensive and also includes the financing of buy-outs and buy-ins and later-stage
financing operations of more mature, small to medium-sized companies. The term “venture
capital” as used in Germany is therefore more in keeping with the American notion of private
equity.15

In much the same way as IPO activity, a German VC market did not really exist before the
early 1980s. This was the case despite early and repeated attempts by the German government to
stimulate the availability of equity financing for small to medium-sized companies.

In the 1960s (first phase), the founding of Kapitalbeteiligungsgesellschaften (KBGs:
equity investment companies) was suggested as a solution to the perceived problem of an equity
shortage in Germany.16 Like investment funds, KBGs should collect the capital of various
financiers and invest it in a portfolio of companies. Preferably, such investments were to be in the
form of a silent partnership17, and ideally the entrepreneur should buy back the KBGs’ share after
five to ten years. In 1965 the first KBGs were founded, many of them as subsidiaries of banks.18
KBGs invested primarily in established, medium-sized companies and the total number of
investments was rather low.

The second phase of VC in Germany started about 1970/71. To encourage KBGs to
increase their investments in small to medium-sized businesses and new ventures, the German
government in 1971 started to offer financial support through the European Recovery Program
(ERP).19 However, KBGs made only little use of this program since it implied severe restrictions.
The law limited investors’ return on investment to an average of 11% p.a. (nowadays 12% p.a.)
over the contracted life span, which basically implied a cap on potential profits. As a

15 See, for example, Black and Gilson (1998). Hence, caution is advised when comparing descriptive statistics.

16 See Persé (1962) and Arbeitsgemeinschaft Selbstandiger Unternehmer (1965). The following description of the
development of VC in Germany is based in parts on Leopold and Frommann (1998) and Lessat et al. (1999).

17 Silent partnerships are debt-like, as such they are supposed to have a finite life and leave as much autonomy of
decision making to the general management as possible. They were and still are the dominant financial
instrument used by KGBs and their portfolio companies. (For a detailed analysis of the financial contracting
behavior of German venture capitalists, see Bascha and Walz (2000).)

18 See Leopold and Frommann (1998) and Nevermann and Falk (1986). For the sake of comparison, in the UK
about 20 years earlier, i.e. in 1945, the
Industrial and Commercial Finance Corporation Ltd., today known as 3i,
was established at the initiative of the Bank of England and in cooperation with major banks. Also, in the US the
first professional VC company named
American Research and Development Corporation was founded as early as
1949.

19 See Bundesministerium für Wirtschaft (German Federal Ministry of Economics) (1970). The financial support
included the opportunity to refinance up to 75% of investments at a preferential interest rate of 5% p.a. and a
coverage of potential losses of up to 70% of total investment.



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