Regulatory obstacles #6: Where are the banks and pension funds?

While we should focus on how to attract more capital to the European private equity and venture ecosystem, we have created a regulatory jungle for many fund managers. Regulations have become more extensive, increasingly complex and to a large extent working against the (good) intentions.

And unfortunately, it seems that things keep moving in the wrong direction. In this article, I’ll share my insights and highlight some of the regulatory obstacles for fund managers when raising funds.

Where are the banks and pension funds?

In Denmark, the number of LPs is limited, and cornerstone LPs in venture funds are almost always “the usual suspect LPs”, which unfortunately does not include banks and pension funds. It is the same picture in most European jurisdictions.

European pension funds manage ~€3.5 trillion, yet only 0.01% is allocated to venture capital. The question is why?

We hear many explanations (or excuses) for this from the banks and pension funds, e.g:

• • risks compared to other asset classes,
  • costs compared to other asset classes,
  • commitment period and time of return of capital,
  • performance of European funds compared to other asset classes,
  • costs relating to the investment being too high compared to ticket size,
  • regulatory requirements under CRR and Solvency II

As for the regulatory requirements under CRR and Solvency II, this is due to the risk of venture capital and the capital requirements triggered by this. In some respects, these requirements make sense, but it contributes to excluding banks and pension funds from committing more capital to venture and growth capital (and at least it provides an excuse for staying out of the asset class).

Looking at the more commercial explanations, it seems obvious that we need to persuade pension funds and banks that venture capital is a powerful asset class that can transform the market, driving innovation, sustainability and economic growth, while also delivering strong financial return.

First and foremost, this requires some success stories in the form of exits to prove that the asset class can deliver strong financial returns. Historically, many European pension funds have preferred (and seem to still prefer) US funds over Europeans funds. This perception only changes with results.

Secondly, my claim is that venture and growth are an instrumental driver for top priority agendas such as developing and keeping tech and innovation in Europe, contributing to the development of the defense sector, supporting energy transition and supporting the green transition.

My claim is also that pension funds and banks have a responsibility that goes beyond delivery of financial return to support these agendas. However, it seems to require political initiatives like Dansk Vækstkapital I to activate pension funds and banks more in the venture and growth ecosystem. Imagine the difference it could make if the contribution from pension fund and banks to venture and growth were just 1% instead of 0.01%.