UK and European pension funds are laying the groundwork to become a more significant source of venture capital (VC) funding, according to a report from Venture Connections, European Women in VC and Pensions for Purpose, with Nordic pension funds the most active, despite growing momentum in the UK.

The report, Mapping Pension Funds Attitudes to Venture & Growth in Europe, suggested that pension funds have the chance to help savers benefit and support long-term economic renewal, estimating that while only 0.12 per cent reaches venture capital, redirecting just 1 per cent could unleash "tens of billions" for breakthrough growth.

The report found that Nordic pension funds are currently the most active in the VC space, allocating around €350m to VC.

The Nordics also demonstrated a strong home bias, keeping roughly 70 per cent of that capital within their own markets, while around 25 per cent is invested in the UK and Ireland.

In addition to this, the report found that the Nordics are not only active investors, but also a top destination for VC allocations from other European pension funds, receiving about €190m in foreign investments.

France and the Benelux region followed in VC allocation by pension funds, attracting around €175m, while Germany, Austria and Switzerland (the DACH region) were also found to be making a growing number of VC commitments.

In contrast, Southern Europe and Central and Eastern Europe significantly lag their peers in both domestic pension fund allocations to VC and as recipients of foreign pension fund investment.

Despite having a higher allocation in overall numbers, the UK's allocations as a proportion of total pensions remained "modest", with around 0.5 per cent of defined contribution (DC) pensions going to VC.

However, the report clarified that while detailed data on VC allocations is only available for DC schemes, total UK pension funds allocate about 3.8 per cent to private equity, with VC included within that figure.

A home bias was also seen in the UK, as while DC and Local Government Pension Scheme (LGPS) listed equity portfolios have strongly shifted overseas over the last decade, roughly 45 per cent of UK pension fund PE investments remained UK-based.

This trend, which was attributed to greater visibility and familiarity with domestic opportunities, is also expected to continue as UK pension funds begin to gradually increase their exposure to VC.

And the report suggested that further growth could soon be seen in the UK, with initiatives such as the Mansion House Compact and Accord set to increase allocations to unlisted assets.

At least half of that will be directed specifically to UK-based investments, which is expected to inject a staggering £25bn into the domestic economy.

This is more than 40 times the amount European pension funds currently allocate to European VC.

The push for scale in the UK could also help, as the report found that a typical £1bn fund allocates 11 per cent to private markets, compared to 20 per cent for a £20bn fund and 2 per cent for a £100bn fund.

Indeed, the report suggested that consolidation positions schemes to overcome barriers that previously limited their private market exposure, such as insufficient scale and governance resource constraints.

There is also growing interest in VC, as the report showed that many pension funds are increasingly attracted to VC by the promise of long-term, risk-adjusted returns.

In the UK and Western Europe, climate innovation and environmental, social and governance (ESG) goals were also emerging as strong motivators.

Issues remain, however, as the report found that limited internal capacity and knowledge gaps are major barriers for pension funds to allocate to VC, and they create a chain reaction.

The report warned that, without familiarity with the broad VC space, pension funds are less likely to engage confidently or build long-term conviction in the asset class. It also limits their ability to assess and challenge fund managers effectively.

In addition to this, it found that cultural mindset plays a role, as in Europe and the UK, VC is still seen as niche and risky, and pension investors are still finding their footing, unlike in the US, where it’s embraced as a mainstream, entrepreneurial asset class.

Whilst the report did not advocate high-risk moves, it called for a measured, governance-friendly approach to venture capital, via existing private equity frameworks and later-stage investments.

In light of this, the report emphasised the need to strengthen internal capacity within pension funds, shift the focus from short-term cost to long-term value, and to improve market infrastructure to support venture capital allocations.

Commenting on the report, UK Chancellor, Rachel Reeves, said: "Together, we can transform pension funds from passive investors into active builders of our economy: fuelling innovation, creating jobs, and unlocking stronger returns for savers while ensuring more capital also flows to the innovators too often overlooked.

"By unlocking institutional capital and backing more women-led and diverse businesses, we can deliver growth that is both more dynamic and more inclusive. In doing so, we secure prosperity for tomorrow while providing security in retirement for today’s savers.”

European Commissioner, Ekaterina Zaharieva, stressed that whilst Europe has the talent, the ideas and the ambition, it now needs the capital, urging European pension funds and asset managers to join in this.

"By investing in Europe’s ventures, they can deliver for their beneficiaries and for Europe alike – financing innovation, creating jobs, and building the technological strength that our sovereignty demands," Zaharieva said.

Adding to this, European Commission director-general for internal market, industry and entrepreneurship and SMEs, Kerstin Jorna, said: “[This] report provides new insights into the risks and constraints that limit pension funds’ investment in equity markets.

"Lack of knowledge and expertise, the high risk of venture capital investments and regulatory barriers are some of them.

"The report also flags successful national initiatives and funds investing in equity. This report will feed in the reflection on how to foster a more active participation of pension funds in support of our businesses, competitiveness and innovation.”

Also commenting on the report, Pensions for Purpose chair and founder, Karen Shackleton, said: “There’s a narrative that pension funds perceive venture capital to be too risky. But our research shows a more nuanced picture: they’re exploring the right structures, learning from peers and preparing to allocate more – it’s just happening quietly, behind the scenes.”

In terms of access, the report found that pension funds overwhelmingly prefer to access VC via funds-of-funds, co-investments, and trusted managers rather than making direct investments themselves.

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