German by way of Jersey

Venture capital in Germany could certainly use more advocacy and support, given the fact that the industry is not one in which the country, or the rest of Europe, for that matter, excels. Homegrown European tech entrepreneurial success stories like that of Niklas Zennström and Janus Friis, the Scandinavian co-founders of the peer-to-peer file sharing network KaZaA and internet telephony network Skype, are few and far in between.

Help, unfortunately, is not on the way. Some regulators on the continent have demonstrated that they are not a benign force for private equity. German social democrat Franz Müntefering has described GPs as ?locusts,? and new proposals by the German government to limit tax breaks for private equity firms have been criticized by the industry. The Bundesverband Alternative Investments (BAI), which lobbies on behalf of institutional investors participating in private equity and other alternative asset classes, in a letter to Finance Minister Peer Steinbrück has described the pending law as ?wholly inadequate? to finally bring about the kind of tax transparency that private equity funds in Germany need in order to attract institutional capital.

One venture capital firm that operates in Germany is not worried about the tax implications of any edicts that the government may pass. ?We don't believe it [tax laws] will affect our business because our funds have a Jersey structure,? says Rainer Strohmenger, general partner at Wellington Partners. ?Our fund structure is tax transparent, so all our investors are taxed according to the taxation laws of their respective jurisdictions. This is independent from the German tax system.?

Wellington Partners is a rare breed on several levels, not least because it is one of the few European venture capital firms to have experienced repeated success. Founded in 1991 by Rolf Dienst, a longtime venture capital investor and current chairman of the German Private Equity and Venture Capital Association (BVK), Wellington is now raising its fifth fund, which at €250 million ($355 million) is its most ambitious to date.

Now the firm is accelerating its pan-European push with plans to establish an office in London, which will be the firm's fourth, in the near future. Munich is home, but to be able to operate offshore funds in Jersey, Wellington had to move its advisors outside of Germany ? to Zurich.

Wellington Partners

Firm commitments
The fundraising environment in 2004 and 2005, when Wellington split its funds and firm, was a difficult one. As the market began picking up for large buyouts, interest in early stage European venture capital was waning. It took a year to raise Wellington's first dedicated technology fund, which closed at €150 million in July 2005.

Wellington's first two funds made investments in both technology and life sciences. The first fund, a €55 million German venture capital fund raised in 1998, was one of the most successful venture capital funds in Europe and probably the most successful of that vintage year, claims Strohmenger, who says the fund had a 53 percent net IRR. Eighty percent of the fund was invested in technology companies and 20 percent in life sciences. The firm's second fund, also German, closed on €210 million in 2000. Ninety percent of its portfolio was in technology and the remainder in life sciences.

Overall, the firm's returns are ?in the high double digits on an IRR basis,? says Markus. ?Our funds are as good as the top quartile funds in the US.?

Whatever the exact number may be, most of the firm's limited partners are returning investors. Ninety percent are institutional investors, with the bulk coming from Europe and the US. One LP is from the Middle East, and there is one LP in the pipeline from Asia. Only one or two LPs have not returned to new funds, due to technical reasons.

Already, Markus considers Wellington the firm among the top five European venture capital players. But staying there ? or improving its standings ? requires ongoing effort. The firm plans open an office in London soon to better capture technology deals that are coming from Scandinavia.

What it means for Wellington is incurring the costs of running additional offices, as well as of ferrying its professionals around its offices. As it is, Keller and Mannheimer spend a couple of days in Munich every week. With a fourth office in London, there will be yet additional costs of moving professionals between its new and existing offices.

With all the partner movements, Keller says that the challenge lies in getting the information flow under control. ?The more you split the office, the less you see each other. That means you have to have shared calendars. We all use the same VOIP system so I can see who's available, where people are sitting. I can put a videoconference together quickly,? he says.

On the back office, all legal and investor related matters are handled from Zurich, while all portfolio information is conducted in Munich. Splitting the firm into two tracks required producing two PPMs, of which separating the data room was necessary.

Wellington Partners is a rare breed on several levels, not least because it is one of the few European venture capital firms to have experienced repeated success. Founded in 1991 by Rolf Dienst. Wellington is now raising its fifth fund, which at €250 million is its most ambitious to date.

As Wellington has a technology venture capital business, do the firm's partners try to influence what technology products the firm buys? ?We have a standard package, but since the technology partners are very much tech driven, they are interested in new products in the market. We have an IT manager in Munich ? he will test the new products first and make sure it doesn't destroy our whole tech environment. If it works, then we buy it,? Keller chuckles.

Expanding networks
The history of the firm can probably be categorized into two periods. Wellington was largely German based in its first eight years before hatching the plan of becoming pan-European in 1999.

Markus, who is Dutch, says of this move to a pan-European strategy: ?I was probably a product of that in the sense that if they didn't have that ambition, they wouldn't have hired me, not as a partner but as an investment manager, in 2000. I had a network only outside of Germany. We started to do deals outside of Germany in 2000; we learned, we made some mistakes, we made some good deals and over time it got us to where we are today.?

The wide networks that are such an integral part of venture capital firms extends to Wellington's venture partners. Five of its nine technology venture partners are based in Silicon Valley. All hold or have held senior management positions in sectors that the firm specializes in.

In life sciences, the firm has on board a regulatory expert in Ulrich Granzer, the former global head of regulatory affairs at pharmaceutical companies BASF Pharma and Bayer. ?As part of our routine due diligence, we consult with Ulrich on the regulatory status of development projects and the probability that these projects can get approved by the authorities. This is critical,? says Strohmenger. ?I think it's unique in the industry for a venture capital firm to have a regulatory expert.?

Wellington has also formalized some co-investment relationships when it participated in a German government program that provides start-up capital for young companies last year. Through the ERP Start-up Fund, German government bank KfW Mittelstandbank can act as a co-investor and put up an additional €3 million for the investments Wellington makes.

With the investments the firm has made and burdens it has undertaken, Wellington now does about 60 percent of its deals outside of German-speaking Europe, in Scandinavia, France, UK, Benelux and Israel. ?We invest in companies with global ambitions that we believe can become global leaders,? says Markus.

With regard to the firm's evolved structure, there is no turning back, says Strohmenger. ?I get asked very often if we would want our next fund to be a combined fund again. I always ask people, why should we do that?? he says. ?We are absolutely happy with what we have done. It's much better working in a specialized team. We believe we will earn better returns than in the past. I couldn't imagine stepping back again.?