Initial Public Offerings and Venture Capital in Germany



experience in Nazi Germany when, according to Hardach (1995), the banks lost much of their
corporate business and were forced into a passive role because of the “financial autarky” of
industry resulting from retained profits, which in turn resulted from lucrative government
contracts, low wages, and a limit on dividends.

Moreover, it is likely that there was a conflict of interest within banks between the two
lines of businesses. An increased importance of the issuing business would have reduced the
profits of the credit business as well as the value of the human capital of those who were active in
the credit business. Those who were active in the credit business were therefore likely to oppose
an increased involvement in the issuing business. But at the same time they were the main
advisers to firms seeking financing.

Hence, mere profitability considerations as well as internal politicking may also have
played a role when large universal banks did not oppose the myth that in order to protect
investors, only the stocks of safe firms should be issued.

It is important to note in this context that the German Banking Act tightly regulates the
entry of investment banks and was relaxed only recently. In addition, the
Borsenzulassungsgesetz
(German Stock Exchange Listing Act) as well as the dominance of banks in the committees of
the stock exchange and the distribution of stocks made entry in the market rather difficult.54 Until
quite recently there were therefore hardly any independent investment banks in Germany that
could have assumed the position as promoters of an active IPO and VC market.

It is interesting to take a closer look at the early 1980s when a small Munich-based asset
management firm, Portfolio Management (PM), initiated several IPOs at the
Freiverkehr, where
at that time a listing was possible without having a bank as an underwriter. Of the 14 IPOs in the
years 1981 to 1983, 8 were led by PM (with an average volume of € 4 million) and 5 by Deutsche
Bank (with an average volume of € 25 million). Even though most of the firms that were brought
to the market by PM failed relatively soon, the activities of PM seem to have influenced the
development of IPO activities in Germany. For example Schürmann and Korfgen (1987) argue
that PM undermined the mythology of “conventional wisdom” about the required age and size of
companies that would be eligible for an IPO and also helped to overcome banks’ opposition

54 See, for example, Giersch and Schmidt (1986) and Gerke (1988).

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