The State of European Venture Capital

The State of European Venture Capital

          
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The State of European Venture Capital

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    A Shortage of Private Investors, a Surplus of State Capital

    Our analysis of the role of European LPs in the VC landscape reveals several salient facts: European institutional investors (including, for instance, pension funds, academic endowments, and family offices) constitute a smaller share of the population of LPs in VC funds than do U.S. institutions. For example, pension funds make up 14 percent of all private VC LPs in Europe, compared with 29 percent in the U.S. (See Exhibit 4.)

    exhibit

    Making the situation worse, since 2008, private investors have slashed their VC investment in both relative and absolute terms. The shortfall in private investment has been covered by government agencies, which stepped in to fill the breach and ensure that European startups obtain at least minimal funding. As a result, the government share of investment in VC funds more than doubled from 2008 through 2014. But government-controlled investments often come with strings attached and tend to favor local or national ventures, to the detriment of cross-border activity and the growth of cross-border funds.

    Several common themes emerged during our interviews with GPs and LPs. They noted that the current European financial-regulatory regime’s discouragement of equity investing has contributed to the low historical performance of many VC funds.

    The market is also highly opaque, which complicates decision making and demands a heavy investment of time and money to build expertise and form networks. All interview subjects agreed that the European VC market is too fragmented and is marked by a large number of small, nationally focused funds, making it difficult for institutional investors to write large investment tickets. A closer look at the GP landscape reveals the extent of the imbalance.