Venture capital funds: what they are, what they are for and how they are formed
Venture capital funds (VCFs) have become a key instrument for corporate financing, particularly in innovative and high-growth sectors such as technology, biotechnology, renewable energy and the digital economy. Through these vehicles, professional investors channel resources into companies with high potential, taking on greater risk in exchange for the possibility of higher returns than those offered by traditional investments.
This article provides a clear and practical explanation of the purpose of venture capital funds, the types of investments they can make, their tax advantages, and the essential steps for establishing one in Spain.
What are venture capital funds?
A venture capital fund is a collective investment vehicle that pools capital from several investors to invest jointly in unlisted companies or in companies listed on alternative markets with low liquidity. Legally, a fund has no separate legal personality; it constitutes a segregated pool of assets dedicated to investment, managed by a Management Company of Closed-Ended Collective Investment Entities (“SGEIC“).
In Spain, the main regulatory framework is Law 22/2014, which governs Venture Capital Entities (ECRs) and other closed-ended collective investment entities.
These funds are structured around a basic principle: investors contribute capital and assume risk, while a professional management company makes investment decisions according to a defined strategy.
What are venture capital funds for?
Venture capital funds perform several essential functions:
- Financing growth companies: they provide capital to businesses that need resources to expand, internationalise, hire talent or develop new products.
- Strategic support: in addition to capital, they contribute business experience, networks and advisory services.
- Value creation: their objective is to improve the company over a number of years and subsequently divest (sell their participation), generating a capital gain.
Channelling private investment into the real economy: they act as a bridge between investors seeking diversification and companies in need of financing.
What types of investments can venture capital funds make?
Venture capital funds may only invest in specific eligible assets. Broadly speaking, they focus on:
Equity interests in unlisted companies, usually innovative or fast-growing (start-ups and scale-ups).
- Shares or interests in companies listed on alternative markets, provided such markets have limited liquidity.
- Convertible debt or hybrid instruments that may be converted into equity (e.g. convertible bonds or mezzanine finance).
- Participations in other venture capital entities, allowing sectoral or geographical diversification.
Spanish law requires that at least 60% of the fund’s assets be invested in these eligible instruments. The remaining portion may be held in cash or liquid financial assets to cover short-term capital requirements.
Prohibitions and restrictions:
- They may not invest in real estate for direct exploitation.
- They may not grant loans on a general basis, except for transactions directly linked to their investment activity.
What are the tax advantages of venture capital funds?
Tax treatment is one of the main reasons why this investment vehicle is so attractive in Spain.
Tax benefits:
- Reduced Corporate Income Tax rate: Venture capital funds are subject to a lower tax rate (generally below the standard 25%), allowing profits to be reinvested with a reduced fiscal impact.
- Capital gains exemption for investors: When an individual investor sells their fund units, they may benefit from significant exemptions or reductions on the realised gain, particularly if the investment is held for a minimum period and reinvestment requirements are met.
- Tax deferral: As long as the investor does not withdraw capital from the fund, no taxation is triggered, enabling compound capitalisation of accumulated returns.
For institutional investors (such as family offices, corporate funds, insurers or pension funds), the incentives are even greater, as the fund structure allows investments to be channelled without immediate taxation.
In essence, venture capital funds enable investment with higher fiscal efficiency, by deferring or reducing tax on realised gains.
How are venture capital funds formed?
Although each project has its own particularities, in Spain the process is typically structured in the following phases:
1) Strategic decision and project definition
- Define the investment thesis (e.g. technology, energy, healthcare, sustainable mobility).
- Identify potential investors (limited partners) and determine the target fund size (commitment).
2) Appointment or creation of the Management Company (SGEIC)
Every venture capital fund must be managed by a management company authorised by the CNMV (Spanish National Securities Market Commission).
The management company is responsible for:
- making investment decisions,
- managing risk,
- overseeing investor reporting and disclosures.
The management company may either be:
- an existing SGEIC (already managing other funds), or
- a newly incorporated entity created specifically for the fund.
3) Preparation of the Fund Regulations and Investment Memorandum
These documents set out:
- the investment strategy,
- the management and performance fees (carried interest),
- the duration of the fund, and
- the divestment policy.
4) CNMV authorisation
The CNMV reviews the documentation to ensure that the fund complies with legal requirements and investor protection rules.
5) Fundraising and first closing
Once authorised, the fund may raise investment commitments and proceed with its first closing, enabling it to begin operations and make investments.
At Devesa, we provide comprehensive legal and tax advisory services for the creation of investment vehicles, including the venture capital funds described in this article. Our services cover: the initial definition of the optimal vehicle structure, tax and legal analysis, drafting of all required documentation (Fund Regulations, Private Placement Memorandum, investor agreements, etc.), and submission to the CNMV for authorisation.
We work in close coordination with the management company that will ultimately manage the vehicle, ensuring that the project progresses smoothly and with full legal certainty. We support our clients throughout the entire process – including fundraising and initial closings – allowing them to focus on what truly matters: identifying opportunities and creating value.
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