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European VC has been transformed in the past decade and is, as a result, not only now performing well, but is also highly competitive on a forward-looking comparison against both European Private Equity and US VC.
Horizon Pooled Return (Net) by Fund Index, June 2018
- Source:
Cambridge Associates
Legend
- Europe Developed Venture Capital Index
- Europe Developed Private Equity Index
- Cambridge Associates US Venture Capital Index
- MSCI Europe Index
- Note:
- As of June 30, 2018.
Pension funds are now more interested in European venture because pension funds look for good returns, and European venture has shown an uplift in returns over last years.
Pension funds are now more interested in European venture because pension funds look for good returns, and European venture has shown an uplift in returns over last years. However, there are some things holding others back from allocating to European VC. Those include the fact that VC investments tend to have long and deep J-curves, which requires long-term capital that can handle illiquidity. Furthermore, a secondary market in European VC is under development but is still immature.
There are very interesting differences between the LP bases supporting European VC GPs in different sub-region. Typically, the more mature the VC ecosystem in a sub-region, the more the LP base diversifies towards private, institutional capital and away from dependency on government agencies. There are also important differences in the level of pension fund commitments across sub-regions. On this front, the Nordics lead the way with pension funds accounting for 16% of total VC funds raised since 2013, more than 7x the European average.
VC funds raised by GP region and LP type (2013-2017)
Legend
- Government agencies
- Fund of funds
- Corporate investors
- Endowments and foundations
- Pension funds
- Private individuals
- Other asset managers (including PE houses other than fund of funds)
- Family offices
- Capital markets
- Sovereign wealth funds
- Banks
- Insurance companies
- Academic institutions
- Note:
- Taken from the European Data Collective, developed by Invest Europe. EDC data converted at EUR:USD of 1.1605, the rate on 30 September 2018.
The LP composition of VC funds also differs significantly depending on the VC fund type, with follow-on funds raising a significantly greater share of capital from institutional investors, such as pension funds, sovereign wealth funds and fund of funds.
Funds raised by fund type and type of LP (2013-2017)
Legend
- Academic institutions
- Banks
- Capital markets
- Corporate investors
- Endowments and foundations
- Family offices
- Fund of funds
- Government agencies
- Insurance companies
- Other asset managers (including PE houses other than fund of funds)
- Pension funds
- Private individuals
- Sovereign wealth funds
- Note:
- Taken from the European Data Collective, developed by Invest Europe. EDC data converted at EUR:USD of 1.1605, the rate on 30 September 2018.
The composition of LP types that invest in European VC funds is very different to those that represent the largest sources of capital to European Buyout funds. Most notably, where European VCs are heavily dependent on government agencies, corporate investors and family offices, European Buyout funds are backed primarily by allocations from pension funds and sovereign wealth funds.
A material share of Europe's VCs have experienced an increase in appetite amongst LPs for investing in European venture. Corporate LPs, family offices and private individuals are leading the way, while pension funds and endowments, foundations and academic institutions appear to lag.
Of course, one reason for the difference in LP commitments is as simple as the scale of the different asset classes. European Buyout funds typically raise 7-8x as much per year as European VC funds with much larger average fund sizes. As such, LP types that have minimum allocation requirements can commit without the concern of being too concentrated as an anchor source of funds for an individual fund manager.
Pension funds have committed 45x more capital to European Buyout funds than VC funds, equivalent to around $75B. In fact, European VCs account for just 2% of the total capital committed to European Buyout/VC funds by pension funds since 2013.
European Buyout funds raise from a diverse LP geographic footprint, but European VCs are overwhelmingly backed from Europe.
We expect to be more active in Europe through investments in venture capital funds, secondaries and co-investments.
At Top Tier we’ve been investing in European venture capital funds since our inception, but most were transatlantic. Currently, we see a real opportunity with Europe-focused funds as returns improve, valuations remain reasonable and the ecosystem develops. The venture business is global, and we see a proliferation of highly qualified and experienced European entrepreneurs and fund managers investing behind innovative technology and life science trends to build global businesses - just like what we see in the US. As a result, we expect to be more active in Europe through investments in venture capital funds, secondaries and co-investments.
LPs can now see that huge success can be found in Europe but the challenge of staying locked up in a 5+5 year fund cycle remains unattractive. We have to remember investors don't just compare VCs to other VCs, they have the option of investing into any asset class.
We believe that investors need to see different structures rather than just the constrictive 5+5 year limited partnership. This is driven by many issues such as liquidity, access, flexibility in the market as well as the need for longer term capital to build bigger companies in Europe. LPs can now see that huge success can be found in Europe but the challenge of staying locked up in a 5+5 year fund cycle remains unattractive. We have to remember investors don't just compare VCs to other VCs, they have the option of investing into any asset class. More liquidity is also attractive to entrepreneurs, who want to be able to reward employees for hard work in the face of huge competition for talent.