Considering that I have spent most of the last decade and a half talking to and advising institutional investors on their private markets allocations, I found it odd that I hadn’t had more contact with venture capital (VC) – so I went looking for answers.
With this in mind, I attended Frankfurt Venture Hub, a VC conference hosted by the Frankfurt School of Finance and Management a couple of weeks ago. This experience quickly confirmed a belief I already held: the region’s institutional investors are not a true active participant in the VC industry. It goes without saying that this statement is an exaggeration, but it is very important point.
Not only were institutional investors hardly represented at the event, few participants seemed to be asking fundamental questions as to why institutional investors were not investing. Instead, they looked to the public sector for answers.
A look at the data appears to confirm this tendency.
While institutional investors (particularly pension funds and foundations) are the largest VC investor groups in the US, it is government entities that dominate in the EU. The government-side investments in VC are best regarded as an acknowledgement of the importance of a domestic venture capital market and an approach to addressing the current gap – they are meant to support the industry and enable more private sector investment, as is made clear by the recent EU Scale Up initiative.
Government intervention in VC has clear motivation: without a strong domestic VC industry, innovative, fast-growing companies may struggle to get the financing they need to flourish, or they may migrate to the US for better access to it. And at present, the European VC market is significantly smaller than its US counterpart.
Venture Capital is not a “no-brainer” as an institutional asset class. Its right skew and low hit rate mean that investors rely on occasional outliers to generate attractive returns. Academic research appears to support the existence of performance persistence[1], which should make it easier for investors to select outperforming funds, but these tend to be oversubscribed and getting access presents a real barrier to many. In summary, if you are going to invest in VC funds, you probably want to be large enough to diversify across many funds and to get access to the best-performing funds.
But these challenges are universal and have not stopped US VC developing into an institutional asset class. The academic literature offers some explanations for the region’s struggle: less favourable exit routes (think IPOs), home bias, a fractured market and the difficulties of operating across countries may make European VC less attractive. From a practitioner perspective, cultural factors, such as career risk and bureaucracy in investment decision making seem like obvious culprits.
This is a shame. For all its challenges, VC is an interesting proposition. Diversification benefits are a credible benefit for a start – in many instances, VC can offer investors the chance to be invested in the disruptors that challenge established business models to which they have exposure elsewhere in their portfolios. This feels particularly pertinent in today’s world.
But institutional investors need return assumptions and, unfortunately, historical VC returns are not easy to evaluate – the time period used has huge implications. Based on Preqin’s time-weighted data series (as at Q1 2026), European VC shows a strong 13.5% annualised return, lagging the North American equivalent (14.5%) slightly and approximately in line with European buyout performance (13.8%). This is despite the much better performance of US funds over the most recent 12 month.
Pulling the comparison back further, however, reveals an astounding underperformance of venture capital versus both European Buyout and North American VC.
Quite how relevant this underperformance is for investors today is a difficult question to answer, and one that is beyond the scope of this week’s newsletter. Nonetheless, getting burned in the past may have left scars on investors now reluctant to (re-)engage with the asset class.
So where does this leave us?
Well, the Scale Up initiative does seem to be helping some European institutional investors move into the VC space. This is promising.
But for wide-spread adoption by institutional investors, brave investment professionals at insurers, pension funds and the like will have to make the case to their superiors that VC deserves a place in their strategic asset allocations. Favourable government initiatives can certainly help; so too should the improved performance figures. The rapid advancement of technology and ensuing disruption in many sectors could add further force to the argument.
Whether this is enough remains an open question. If they do, it could transform the European VC market.
[1] See Robert S. Harris, Tim Jenkinson, Steven N. Kaplan, Ruediger Stucke, Has persistence persisted in private equity? Evidence from buyout and venture capital funds, Journal of Corporate Finance,
Volume 81,2023, 102361,https://doi.org/10.1016/j.jcorpfin.2023.102361.