Germany today announced the closing of a €1bn fund of funds, dubbed ‘Growth Fund Germany’, to invest in German and European VC funds.
The fund forms a key part of the federal government’s Future Fund, set up in 2021 to bolster the VC industry in Germany.
The idea of the new fund of funds is to make more growth capital, which has traditionally been lacking in Europe, more available to startups and to strengthen Germany and Europe as a business location, says German state-backed investor and LP KfW Capital in a press release.
Most European governments are also investors in venture. Some of them, like France, which allocates €1bn a year to a national fund of funds run by Bpifrance, want to ensure there’s enough financing for European homegrown startups to compete with their rivals in the US and Asia. Others, especially governments in central and eastern Europe like Poland and Hungary, use public money to encourage nascent local venture markets.
Germany’s new growth fund, however, is funded primarily by private investors. Two-thirds (€650m) of the capital is provided by over 20 institutional investors, including insurers, foundations, asset managers and large family offices such as Allianz, BlackRock, Debeka, Generali Deutschland, HUK-Coburg and Gothaer Versicherungen, among others. The rest is provided by the fund’s anchor investors: Germany’s federal government and KfW Capital, a subsidiary of the state development bank and a major LP in German and European VC funds.
Already, the fund of funds has invested €265m in 16 venture capital funds — including deeptech investor Vsquared Ventures and Gilde Healthcare, which invests in medtech, diagnostics, digital health and therapeutics. It has collectively invested in 60 companies.
Mobilising private capital
That the new growth fund is funded primarily by private investors is significant for a country where mobilising private capital hasn’t been the norm. Unlike the US, many insurance companies and pension funds in Germany invest in bonds and tend to avoid venture capital, affecting how much capital is available to startups, particularly at the later stages.
According to a 2023 analysis by the VC firm Redstone, US pension funds own 10% of Germany’s tech unicorns, compared with 0.2% held by German pension funds.
“This is the first time a vehicle has been created in Germany that aims to mobilise capital from institutional investors for the venture capital asset class at fund level. This is a completely new approach and particularly important for mobilising “fresh capital” for venture capital and… startup financing,” says Christoph J. Stresing, managing director of the German Startups Association.
“The capital in Germany is ’there’. So far, it has just not been allocated in a future-oriented manner. The growth fund is a first step towards changing that.”
Other European nations are eager to encourage private institutional investors to back fast-growing, innovative companies. Earlier this year, the UK government announced an agreement to get pensions to invest as much as £75bn into British startups and VC firms.
The criteria
The majority of the new €1bn fund is expected to be invested into later-stage VCs that write bigger cheques, says Andreas Seehofer, investor relations manager at KfW Capital.
Other expectations of the fund include:
- The new growth fund will invest in VCs focusing on digital services, life science, climate tech and food tech.
- There is no specific quota for investing in firms with female managers.
- The VCs themselves have to invest 50% of the capital they receive from the fund into European startups.
Out of the 16 funds the $1bn growth fund has already invested in:
- Half are German VCs and half are European funds.
- 75% of the funds are Article 8 funds, promoting environmental and social governance (ESG), or Article 9 funds, that have sustainable investment or a reduction in carbon emissions as their objective.
Correction: This article originally stated that the fund's criteria is to invest 75% of the fund into Article 8 and 9 funds. This has been changed to reflect the fact that 75% of the VCs the fund has already invested in are Article 8 and 9 funds.
