One of the tropes of our times is that legislation kills innovation. But occasionally it can enable it too.
One of the best examples is the Employee Retirement Income Security Act adopted in the US by 1974. The act may sound excruciatingly dull but it is no exaggeration to say it was foundational in creating the US venture capital industry that super-charged the rise of Apple, Google, Facebook and many more.
ERISA allowed institutional investors to allocate money to “alternative” assets, such as VC, private equity and hedge funds. Further changes to capital gains tax and the subsequent clarification that the “prudent person” rule applied to an institution’s entire portfolio, not just individual investments, sucked even more money into the industry.
As Sebastian Mallaby describes in The Power Law, his history of the VC industry, these legislative changes must count among the most consequential public policy tools ever adopted.
It is frustrating therefore that Europe, which considers itself the spiritual home of enabling regulation, has not studied ERISA more closely — still less copied it. If anything, Europe has moved in the opposite direction over the past five decades: some governments have mandated that pension funds de-risk their portfolios rather than freeing them to invest in alternative assets.
Even public market equities have been deemed too racy for some investors in the UK. Between 1997 and 2022, British pension fund holdings of UK equities fell from 53% to 4.4% of assets, according to a report from the think tank New Financial. Little wonder that the London Stock Exchange has struggled as an attractive market for startup IPOs.
Belatedly, some European governments have been attempting to mobilise more growth capital to inject dynamism into their economies.
The Tibi initiative in France, launched in 2019, has successfully enticed some of the country’s largest insurers — including AXA, Crédit Agricole Assurances, Groupama and Maif — to back French startups. The German government launched a Future Fund – or Zukunftsfonds – in 2020 to help mobilise public and private capital for late-stage startups. And the British government has been pushing the Mansion House Accord that aims to inject £50bn into VC and infrastructure investments by 2030.
But all these initiatives have faced resistance from some institutional investors, who do not want to be told where to allocate their funds. Some, probably rightly, fear they will be viewed as the “dumb” money by private equity industry investors determined to sustain their portfolios’ heady valuations, rake off fees and keep their financial merry-go-round spinning.
Founders, too, may not care very much where their funding comes from so long as it comes from somewhere. Indeed, there may be advantages in taking money from US or Middle Eastern investors, in particular, who can often help their businesses expand geographically.
Still, it is bizarre that US, Canadian and Middle Eastern investors are often more enthusiastic backers of Europe’s startup sector than are their local counterparts. And it is depressing (from a European perspective) that retired Canadian and Californian teachers might end up being bigger beneficiaries of the success of European startups than Europe’s own pensioners.
That makes it all the more welcome to see some British institutional funds, such as Legal & General and Baillie Gifford, acting on their own initiative to increase private market investments. This week, Schroders also closed a $600m fund to invest in VC funds, startups and secondaries. This followed an earlier $500m fund to back early-stage British companies, such as Synthesia and Luminance.
Steven Yang, head of innovation at Schroders Capital, said that “compelling opportunities” were emerging in venture investing because of disruptive innovation occurring at pace on a global scale, particularly in AI and biopharma.
That approach surely points the way to the future. If the opportunities are enticing enough then even the stodgiest institutional investor may eventually respond, regardless of government blandishments or mandates. Ultimately, the best way for European startups to win more funding from European investors is — to mangle L’Oréal’s slogan — because they’re worth it.
Read the orginal article: https://sifted.eu/articles/schroders-vc-europe-investment-pensions-carrots/
