At the beginning of April, Federal Minister for the Economy Peter Altmaier and Federal Minister of Finance Olaf Scholz announced an aid package for start-ups, whose first stage (Pillar 1) aims to support larger new businesses that have already received or are set to receive financing from venture capital funds. This ‘Corona Matching Facility’ or ‘CMF’ is now being set in motion.
From now on, venture capital funds (‘VC funds’) can apply to the Kreditanstalt für Wiederaufbau (‘KfW’) for co-financing via its subsidiary KfW Capital GmbH & Co. KG (‘KfW Capital’), so that they can keep supplying German start-ups with sufficient funding. Applications can apply retroactively to include finance provided after 2 April 2020.
CMF is designed to assist German start-ups ‘with sustainable business models’ by ameliorating liquidity shortages that arise or threaten to arise because rounds of financing are postponed or cancelled due to the coronavirus pandemic.
The start-ups themselves are not entitled to apply; only independent European VC funds are. These may be funds that already receive money from KfW Capital or European Investment Fund investment programmes, or they may be ‘new’ funds that have not yet received any public subsidies from those two lenders. It is not yet clear whether family offices and larger business angels will be entitled to apply.
II. Conditions of eligibility for funding
The requirements for claiming the fee- and interest-free Corona Matching Facility are as follows: (i) investors must be accredited by KfW; (ii) the VC fund must pass KfW Capital’s due diligence; (iii) individual financial and strategic investors may not hold a controlling interest in the target; (iv) the start-up must have close links to Germany; (vi) the start-up may not have been in financial difficulty on 31 December 2019. Convertible loans and equity financing are eligible for financing, pari passu with the private investor.
III. Funding arrangements, matching ratio and Andienungspflicht
The legal relationship between an accredited VC fund and KfW Capital is that of a trust regulated by a co-investment and trust agreement, on whose basis the VC fund invests federal funds in the start-up as a trustee.
VC funds can ‘match’ or ‘reflect’ their investment in start-ups using public CMF funds at a ratio of 50/50. There is also the option of topping up public funding to a maximum ratio of 70 to 30 (i.e. 70% public funds, 30% private funds). But CMF funds may never make up more than 50% of the investment volume of any given round of financing. As part of the application process, the VC fund has to choose a fixed matching ratio – i.e. the aforementioned relationship between publicly subsidised funds and private investment – which will then apply to all future investments in the VC fund’s portfolio.
The flip side of this subsidy is that the VC fund is obliged, until 31 December 2020, to offer KfW Capital a share in any other investments it makes in its existing portfolio businesses, at the same matching ratio. This duty is called an Andienungspflicht, or duty to offer.
The VC fund can also have new investments (i.e. investments in companies not included in its existing portfolio) matched using CMF funds. A second matching ratio has to be chosen for this, which then applies to any new investments up until 31 December 2020. If it does this, the VC fund then has an Andienungspflicht to KfW Capital, which may take a share in any new investments.
Over the next few weeks we expect to learn the key features of Pillar 2 of the two billion euro rescue package, which will be primarily for the large number of smaller start-ups that tend to be financed by business angels.
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