Pension funds set to drive Europe's innovation boom

Pension funds across Europe are poised to play a growing role in venture capital (VC) funding, according to a new report. Nordic and UK funds have already committed billions, and pension funds in France, Benelux, and DACH regions are also making VC commitments. While just 0.12% of Europe's €3 trillion in pension assets is currently invested in VC, redirecting even 1% could unlock tens of billions for breakthrough growth. The report suggests that even a modest shift of 1-2% of pension assets could channel an additional €37.5 billion annually into European VC, effectively closing the funding gap and reshaping Europe's competitiveness.

The report by Venture Connections, European Women in VC, Pensions for Purpose, and the European Commission’s Directorate General for Research & Innovation highlights the risks and constraints that limit pension funds' VC investments. Among them are issues such as a lack of knowledge and regulatory barriers, as well as flags for successful national initiatives to encourage greater participation.

Bridging the funding gap

The report highlights a significant disparity between US and European pension fund allocations to private assets. While US pension funds allocate over 10% of their assets to private assets, European pension funds invest less than 0.1%. This gap underscores a critical need to unlock pension capital for innovation, growth, and competitiveness in Europe.

"I urge Europe’s pension funds and asset managers to join us. By investing in Europe’s ventures, they can deliver for their beneficiaries and for Europe alike – financing innovation, creating jobs, and building the technological strength that our sovereignty demands,” stated European Commissioner for Startups, Research and Innovation Ekaterina Zaharieva.

Currently, Nordic pension funds lead the way in Europe, allocating approximately $400 million to VC and showing a strong preference for investing in their own markets, retaining about 70% of their capital domestically. In the UK, while defined contribution (DC) pensions allocate a modest 0.5% of assets to VC, the Mansion House Compact has set an ambitious goal to increase this to at least 5% by 2030. This initiative reflects a broader recognition of the potential benefits of VC investments for both pensioners and the European economy.

Attraction to Venture Capital

The analysis reveals that pension funds are increasingly drawn to venture capital for the potential for long-term, risk-adjusted returns, as well as the opportunity to support climate innovation and Environmental, Social, and Governance (ESG) goals, particularly in the UK and Western Europe. Rather than making direct investments, pension funds prefer to access VC through funds of funds, co-investments, and trusted managers, which simplifies oversight and reduces the burden on their internal resources.

Regulatory overhaul and future prospects

Michiel Scheffer, President of the European Innovation Council Board, emphasizes the necessity of a regulatory overhaul to make equity investment more appealing, both directly and through venture capital funds. "Until such changes take effect, likely around 2028, there is a need to experiment with this emerging asset class. Public investment banks should take the lead," he underscored.

According to Kirsten Dunlop, CEO of Climate KIC, and Ben Honan, Investment Lead at Climate KIC, European VC has demonstrated a strong financial track record, consistently outperforming public markets and even US investments over the past five, ten, and fifteen years, with limited risk of capital loss.