HV Capital doubles down on DACH investments with new EUR 710m early-stage and growth fund

The total amount raised will be evenly distributed between the strategies, HV Capital’s general partner Rainer Märkle told Unquote, noting that the firm plans to make ten to 12 ventures and three to five growth investments per year.

As the firm managed to significantly ramp up the size of its latest fund from that of its predecessor, which closed on EUR 535m in October 2020, it has slightly increased the up to EUR 50m total it used to commit in growth stage startups, he said.

HV Capital’s eighth fund, one third of which was dedicated to the growth strategy, is now fully deployed and about half is reserved for follow-on investments across portfolio companies, he added.

The firm used to reserve about 75% of its follow-on capital for early-stage deals, given the higher upfront risk, with the remaining 25% for reinvestments across its growth portfolio. With its new venture and growth strategy, it plans to make solely new investments, but it could consider reserving about a third of its total capital for later-stage rounds of successful startups, including possible candidates in its current portfolio. “There's no obligation though,” he said, noting that the firm’s priority is to come up “the best possible” deal flow of entirely new targets.

Fund IX’s marks HV Capital’s first vehicle under Article 8 of the EU’s Sustainable Finance Disclosure Regulation (SFDR). In line with this, HV Capital is targeting 33% female representation in C-suite level positions across the portfolio, as well as allocating 30% of the fund’s capital to companies aligned with the Climate Action & Environmental Sustainability criteria of the European Investment Fund (EIF), by the end of the fund’s lifecycle, according to a press release.

“We are one of the first general funds to go on this classification and we are highly committed as a team towards this strategy and also to our investors,” said Märkle. “It's actually still relatively early for our industry, hence the processes in terms of reporting results is still in work in progress, but we are exchanging views with investors about how to set this up properly for both sides.”

YPOG provided tax, legal and regulatory advice to HV Capital’s new fund, according to a press release from the Germany-based law firm.

Investors
The fundraising process started internally, alongside talks with anchor investors, about one and a half years ago, at the beginning of 2022. The process was kick-started last May at the HV Capital Summit, with a first close in December 2022, Märkle said. As the market environment was changing “dramatically” throughout last year, fundraising was more challenging than originally anticipated, he added.

LPs in the fund include institutional investors such as the European Investment Fund (EIF) and German state-owned investment and development bank KfW, as well as endowments, family offices, corporates and funds-of-funds across Europe and the US.

In its previous funds, the firm had almost no Germany-based capital, but it managed to increase the share of German investors in Fund IX, Märkle said. It continues to pursue relationships with the network of LPs domiciled in the country, he added.

Investments
The venture vehicle will be targeting pre-seed to Series A financing rounds, with entry tickets ranging from EUR 500,000 to EUR 5m, said Märkle. For its growth deals, the firm will be participating in Series B rounds and beyond with ticket sizes starting at around EUR 10m and reaching up to EUR 60m per startup.

Looking ahead, the firm wants to double down its investments in the DACH region, he said, noting that it seeks to establish a leading position in that market. It will continue to leverage HV Capital’s brand reception throughout Europe to secure international deal flow, with a target of 60% to 70% deployment in the German-speaking regions and 30% to 40% in the rest of Europe, he added. The firm, which outside Germany is the most active in the UK and France, is also scanning the Nordics and occasionally explores opportunities in Israel.

Areas of interest include fintech, SaaS enterprise, mobility, sustainability, B2B marketplaces and partially blockchain, he said. With the portfolio currently overweight in the non-consumer and enterprise tech field, the ninth fund will seek to increase consumer investments. “The pipeline is equally weighted across the two approaches but when it comes to consumers, we are less structured top down and are much more opportunistic, soaking up what entrepreneurs are working on,” he said.

While market volatility has brought the sector out of investors’ and entrepreneurs’ focus, he said, the firm has been monitoring the consumer segment ahead of the next wave of opportunities.

It is bullish on reaching its deployment targets as it has been exploring quality assets on both the venture and growth space, he said, despite the overall slowdown in dealflow volume, especially in growth stages.

The fund invested EUR 46m in March 2023 in Copenhagen-based soil carbon startup Agreena, while participating in early-stage rounds for three more businesses, namely Berlin-based govtech startup Polyteia in March 2023, Munich-based energy transition management business Ecoplanet in April 2022, and most recently Berlin-based engineering intelligence startup SPREAD.

With the exit environment largely closed both in terms of IPOs and M&A, the firm is currently focused on preparing its portfolio companies for the next offloading window. For example, FlixBus, a German bus operator, is IPO-ready, he said. FlixBus posted revenues of EUR 1.5bn in 2022 and is looking to achieve more than 20% profitable revenue growth in 2023, according to a press release from the company.

The company is held in the firm’s continuation vehicle HV COCO Growth, which closed on EUR 430m in February 2022. The fund has not made any exits so far but houses the remaining portfolio companies from the GP’s 2010-2015 funds.

“We've delivered more than EUR 2bn in cash to our investors since inception and more than EUR 1bn in 2021 alone, so we have less pressure from investors to deliver liquidity and we can focus on building companies for the long term, which is a pretty advantageous position to be in,” said Märkle.

People
HV Capital - Rainer Märkle (general partner).

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