Dusseldorf The start-up investor HV Capital is bringing a new financing model to the German venture capital market: His company has “set up the first continuation fund in the German venture capital scene,” says general partner Martin Weber.
So-called “continuation funds” collect capital to give start-ups more time for a sale or IPO at a more favorable time.
In the case of HV Capital, this now helps the portfolio company Flixmobility in particular. In general, such funds can solve a classic dilemma in start-up financing – and the construct could soon become a successful model in Germany as well.
Start-ups should generally be ready for an IPO within ten years. At least that is the plan of most investors who put their money in young companies very early on. After the ten-year period, they want their deposits back and a return.
The reality, however, often looks different. Fixed fund terms then lead to critical situations. Either investors have to resell their holdings. They often have to accept prices below the rating. Or they push portfolio companies to sell or go public. In the worst case, the whole company can fail.
So far, investors in Germany have often had to sell too early
“The major company values are not always generated within ten-year cycles, but often in a period of eight to 15 years,” says David Kuczek, also General Partner at HV Capital. This is shown by the experience of investors and is also proven by studies.
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The Munich-based venture capital investor has already sold stakes in companies that the investment team would have preferred to keep. Kuczek cites the example of the recipe box provider Hellofresh.
Unfavorable framework conditions can also speak against a sale or IPO after about ten years. This applies twice to the HV Capital portfolio company Flixmobility. HV Capital invested in the company with its fifth fund, which started in 2012 and is now at the end of its term.
On the one hand, the travel provider with the brands Flixbus and Flixtrain was hit hard by the pandemic. On the other hand, the recent slump in tech stocks has left the prospects for a successful IPO (initial public offering) looking bleak for the foreseeable future.
With the “Coco Growth Fund” planned since March of last year, HV Capital is giving itself and what is probably the most promising company in the portfolio more time. The Munich-based venture capital company has collected 430 million euros, with which it can buy practically all of the shares in the fourth, fifth and sixth funds itself. In addition, part of the capital is to be made available for possible follow-up financing.
Current market situation bad for IPOs
The money comes from the anchor investor Harbourvest, which is known for such deals, as well as from LGT Capital Partners, family offices and financial institutions.
Existing investors can opt out of the transaction. At the same time, HV Capital can hold on to the investments together with long-term investors. The continuity fund is designed for five years, during which the market situation for Flixmobility and other companies can improve.
Other companies where HV Capital still hopes to make bigger profits include staffing firm Studitemps, training provider Lecturio, marketing firm Global Savings Group and payments service provider Sumup.
“It’s good that we’re not forced to push portfolio companies to go public or to sell our holdings on the secondary market,” says Kuczek. Thanks to the new fund, existing investors would have received an attractive return regardless of the current market situation.
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The continuity fund model is already widespread in the private equity sector. International venture capitalists also use it to some extent. According to Handelsblatt information, there have only been smaller transactions in Germany that were structured in a similar way.
There is always a risk of conflicts of interest with continuity funds
The following always applies: pricing continuity funds is complex. “The existing investors expect a reasonable price. New investors expect attractive entry prices in order to generate a return,” says Kuczek, describing a conflict of interest. The new investors are now expecting a doubling or tripling of their investment.
An industry expert, who did not want to comment on the matter by name, confirms the potential for conflict: “The conflict of interest is particularly great when there is uncertainty about the intrinsic value of one’s own portfolio companies.”
HV Capital may have information about the interest of other financial investors and their bids in an upcoming further round of financing.
In order to deal with this conflict, HV Capital has had the support of financial advisor Campbell Lutyens, who determined the market price for all of the portfolio companies in an auction. According to Kuczek, this price is slightly above the book value that the companies have according to their most recent financing rounds.
The industry expert sees the well-known financial advisor as a positive sign, as does HV Capital’s decision to hold on to all of its own holdings. The investment team has a stake of more than ten percent in the new vehicle.
If HV Capital manages the transaction well for everyone involved, the expert sees the new fund as a potential model for success for other venture capital funds in Germany. “It is important that there is an ecosystem in which companies can grow until they are ready for an IPO or sale.”
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