Demystifying growth private equity and venture capital to institutional investors

This article was first published in the Luxembourg Private Equity Association’s magazine Insight/Out # 27 featuring a multifaceted cover dossier on the European Investment Fund (EIF) and the in-depth interview below with Uli Grabenwarter, Director of Equity Investments & Guarantees.

According to InvestEurope, European private equity (PE) and venture capital (VC) fundraising surged to €170 billion in 2022 but only half of the funds came from investors from Europe. When looking into investors preference, about two thirds of the funds (65%) went into buyout funds (especially from pension funds) and only one third into growth and venture capital funds, where the main sources of funds were family offices and private individuals, funds of funds and asset managers and government agencies.

In our day-to-day work at the EIF, we see a lot of funds, in particular the smaller but still potentially successful ones, struggling to raise money outside friends and family. Anecdotally, a German life science fund manager recently admitted not calling pension funds any longer given the recurring rejection they were getting. 

A recent study from Redstone reveals that German retirees, for example, largely miss out on the substantial success of German and European start- ups, while their US counterparts benefit significantly: US pension funds hold an impressive €4.7 billion stake in German start-ups, whereas German retirees benefit from a modest €94 million share. What a shame!

Why are European institutional investors, such as pension funds and insurance companies so reluctant to invest into growth private equity and venture capital? Well, the following seem to be fundamental perceptions and difficulties that limit the interest of European institutional investors:

• The European private capital market is highly fragmented and heterogeneous across countries with differing regulations and country specific peculiarities which make it difficult for investors to cover the entirety of the European market.
• Certain regulations enforce punitive capital requirements in relation to PE/VC exposures. For instance, under Solvency II, the capital requirement for insurance companies varies from 33% to 50% whenever they invest their balance-sheet into PE/VC (some indicated that they cap their exposure to less than 2% in PE/VC because of Solvency II).
• There is still a perception across European investors that lower-mid market PE and VC are too risky (versus buyout funds), as a lot of European investors faced significant losses in this asset class in the early 2000’s. But on recent vintages and despite the Covid pandemic and the macro-economic situation (Ukraine war, rising inflation and interest rates), European VC Tech funds are generating an equivalent, if not better, return than their US peers

The EIF plays a vital role in the pan-European PE/VC market, acting as an investment advisor of diversified PE/VC funds of funds (e.g. the Asset Management Umbrella Fund (AMUF) and the Sustainable Development Umbrella Fund (SDUF)). Such fund of funds structures provide cost efficient access to Europe’s high performing PE and VC managers and enable investors to tailor their allocations to different investment strategies.

Is it not the right time for European pension funds and insurance companies to invest more in the promising long- term European PE/VC asset class? We are here to help demystify that space for institutional investors thanks to our long-term presence and unique expertise in the markets.