Startup associations from across Europe are calling on the freshly appointed European Commission to implement a series of measures to encourage institutional investors like pension funds and insurance companies to invest more money in VC funds.
In an open letter to the new Commissioners, who were appointed at the end of November, 26 startup associations (including France Digitale, Invest Europe, the Italian Tech Alliance and Startup Poland) point to the “lack of involvement from European institutional investors” in European VC.
This partly explains why Europe has less VC capital available to fund startups than other hubs, states the letter. In a report published alongside the letter, France Digitale finds that 5% of VC capital globally is raised in Europe, compared to 52% in the US and 40% in China.
“The funding chain in Europe is therefore deficient,” states the letter — with the consequence that many startups seek funds elsewhere, notably in the USA, at growth stage.
The signatories make a number of proposals to remedy this, which include creating an initiative to pool capital from Europe’s institutional investors in a centralised fund of funds to invest in VC funds across the region.
It’s a similar proposal to the Tibi initiative, a national scheme which launched in France in 2019 to encourage French institutional investors to commit to investing a certain amount of their capital in VC, while selecting VC funds that are trustworthy candidates for these investments. Tibi isn’t a fund of funds but rather creates links between French institutional investors and French VCs to facilitate investments.
To increase the amounts of capital that institutional investors are ready to allocate to VC, the signatories to the letter also suggest creating a new financial product dubbed the EU Long-Term Savings Product, to encourage the investment of European citizens’ savings from their private pensions into long-term, riskier assets such as VC.
The letter also calls for change to the regulations that limit the riskier investments that insurance companies and banks can make. These rules put a requirement on companies to hold more capital for riskier exposures, and are designed to ensure that these organisations can absorb losses — which limits their involvement in VC investments.
“We need to create new pockets of investment [in VC],” Maya Noël, CEO of France Digitale, tells Sifted. “And this is money we have to find in the private sector.”
The institutional investment gap
At the end of 2019, institutional investors in OECD countries managed more than $100tn, according to the OECD’s estimate — but where that money gets invested differs country to country.
France Digitale’s report shows that out of the ‘alternative investments’ made by European institutional investors — investments that aren’t stocks, bonds or cash —, 8% is allocated to VC, compared to 16% in the US.
About a third (30%) of the total money raised by VCs in Europe comes from institutional investors, says the report, compared to 72% in the US. This puts institutional investors in Europe behind government agencies (37%) when it comes to backing VCs.
This is due to stronger risk aversion among European investors, says the report, combined with tighter rules in the region that limit how much risk these funds can take when allocating their assets.
The study says that this has a direct impact on the amounts of capital that is in turn available to European startups and scaleups. The European Investment Bank (EIB) previously found that on average, a 10-year-old scaleup HQ’d in San Francisco raises more than $600m in that time — about twice as much as an equivalent can expect in the EU.
Attracting institutional investors’ capital
France Digitale says that closing the funding gap with the US will require tapping the deep pockets of institutional investors.
“We don’t want to seek more public money,” says Noël. “We think there is a share of private money that is available and that we can direct towards VC, by considering that investing a small share of capital is not taking a risk for the private investor, but on the contrary providing the possibility of even greater returns, just like the Americans do.”
To this end, France Digitale and its co-signatories call for the creation of a European VC Initiative (ECVI) — which would encourage institutional investors across Europe to commit to a target investment in VC, and pool the capital in a European fund-of-fund in charge of allocating the money to VCs.
The proposal is partly inspired by the Tibi initiative in France, which since launching six years ago has convinced 28 French institutional investors, including insurance companies AXA and Maif, to pledge a total €13bn to back the ecosystem — of which €6.4bn has been deployed to date.
Other European countries are developing their own initiatives off the back of Tibi. In Germany, 20 institutional investors have committed a total €1bn to a fund-of-fund dubbed Wachstumsfonds, which is in turn allocated to German VCs.
Last year, the UK government launched the ‘venture capital investment compact’ — an initiative in which VC firms work together with pension funds to identify investment opportunities. Nine pension funds in the country have agreed to invest at least 5% of their default funds into VC by 2030 — and the government recently unveiled plans to consolidate and pool capital from more funds.
France Digitale hopes that the ECVI can bring these projects to a European scale. “Tibi is an interesting initiative, but it doesn’t Europeanise the market,” says Antoine Latran, European affairs coordinator at France Digitale.
“We don’t have a European innovation ecosystem where European LPs fund European VCs that fund European scaleups.”
Read the orginal article: https://sifted.eu/articles/open-letter-european-tibi/
