European pension funds ‘punching below weight’ on VC investments

European pension funds are ‘punching below their weight’ when it comes to investments in venture capital (VC), a report by Atomico has stated.

Its State of European Tech report found that in 2022, just 0.024 per cent of pension fund AUM was invested into European VCs, which is in line with the average over the past five years. However, Atomico argued that even a small increase in that share would transform the ecosystem.

The report did however fund that VCs based in the Nordics are the largest beneficiaries of local pension funds’ investment activities. The Nordics is also the region in Europe with the highest share of funding raised from non-local pension funds.

“Considering their scale, European pension funds have historically punched well below their weight as investors in the region’s entrepreneurial and growth ecosystem. As the State of European Tech has called out over the years, when comparing the total AUM of European pension funds, the share from this dedicated to the venture asset class is minuscule,” the report said.

The reported assets of European Union pension funds stands at USD 3.4trn in total and adding in the assets of the UK would double this and thus halve the figure going to VC. However, the report also noted that there are several barriers that hold back pension funds from investing in VC.

“The most commonly cited reasons for pension funds to hold back in their investment levels was perceived to be a lack of relevant experience of investing in the asset class, the relative perceived risk to other asset classes, followed by regulatory/legislative constraints. Beyond these challenges, a variety of other perceived barriers were also frequently cited by survey respondents, including institutional governance and approval processes, limited relationships and networks within the space, and the potential bias of entrenched adviser networks,” the report noted.

“It’s clear that a significant level of knowledge-sharing and education will be needed at an ecosystem level to work in collaboration with institutional investors, policymakers, advisers and other stakeholders to seek to address these concerns and remove potential barriers to allocation at scale.”

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