Hello there,
When people talk about the funding gap in Europe, the conversation often turns to public policy, government programs, or the question of whether there is enough support for innovation. But that’s only part of the picture.
What really stands out is something less visible, and arguably more important over the long term: the lack of domestic institutional capital, especially from pension funds.
In the UK, for example, overseas pension funds have invested around 16 times as much in venture capital as domestic ones. In some years, as much as two-thirds of all VC funding has come from outside the country, while local pension funds have allocated almost nothing to the asset class for more than a decade.
Put simply, there is no shortage of capital flowing into European innovation. But most of it isn’t coming from within Europe itself. This creates an imbalance that goes beyond funding availability. European companies are being built, scaled, and, in many cases, exited with the support of foreign capital, meaning that a large share of the financial upside is captured abroad.
Over time, this has an impact, meaning the economic benefits of innovation are not fully recycled back into the local system. It makes venture ecosystems more dependent on external investors and global market conditions. And it raises broader questions about control, resilience, and the extent of Europe's ownership of its own innovation economy.
Europe Starts to Unlock Pension Capital for Private Markets
In Italy, tax incentives are beginning to play a key role in encouraging pension funds to allocate more capital to venture capital, showing how policy can directly influence investment behavior. Pension funds that invest in certain “qualified” venture investments can benefit from tax-exempt returns, making the asset class more attractive to long-term institutional investors.
While venture capital remains a niche allocation for most pension funds, these incentives are starting to turn the direction of travel, helping channel more institutional capital into innovation, supporting high-growth sectors such as healthcare and technology, and strengthening the link between long-term savings and the real economy.
In Switzerland, pension funds are showing interest in venture capital, but in practice, they remain prudent, maintaining limited exposure and keeping it a small part of their overall portfolios rather than making it a core investment strategy. Most pension funds allocate only around 1–2% of their assets to private equity in total, and venture capital sits within that as a “satellite” exposure, used mainly to complement more stable buyout investments rather than drive returns on its own.
Even though regulations now allow pension funds to invest up to 5% in venture, this has not led to a meaningful increase in allocations, as several structural challenges remain. These include the long lock-up periods, the difficulty of selecting the right managers, the need for specialized internal expertise, higher fees, and the wide variation in returns across funds.
As a result, while the direction of travel suggests growing awareness of venture as an asset class, most pension funds are still moving slowly, highlighting how difficult it is to turn interest into actual capital deployment.
Romania is also beginning to explore how pension funds can play a larger role in funding private equity and venture capital, reflecting a broader shift across Europe. Today, privately managed pension funds in Romania have very limited exposure to private markets, with only about 0.2% of their portfolios invested in private equity despite a legal cap of 1%.
A new proposal would gradually increase that limit to 5%, which could unlock more than €2 billion in potential investment, but with an important condition: public institutions, such as the Investment and Development Bank, would be involved to help structure and oversee these investments, thereby reducing perceived risk.
The Bigger Picture: Europe Has the Capital, But It’s Not Being Deployed
If you take a step back and look at the data, the scale of the gap becomes much clearer.
Across Europe, pension funds manage more than €3 trillion in assets, which makes them one of the largest sources of long-term capital in the region. And yet, according to market data, only around 0.12% of that capital is currently allocated to venture and growth investments. At the same time, European startups continue to raise billions every year, often relying heavily on international investors to do so.
Source: Mapping Pension Funds’ Attitudes - European Women in VC
The challenge is not that Europe lacks capital. It is that this capital is not being directed toward innovation at scale. As we already saw, many pension funds still approach venture capital indirectly, treating it as a small part of their broader private equity allocation rather than as a distinct strategy. They tend to favor later-stage investments, diversified fund-of-funds, or externally managed vehicles, which help reduce risk but also limit direct exposure to early-stage innovation.
When you compare this to the US, the difference becomes even more pronounced. American pension funds have historically allocated much larger portions of their portfolios to private markets, which has helped build deeper, more self-sustaining venture ecosystems. In Europe, by contrast, the system is still evolving, and institutional capital has not yet fully caught up with the growth of the startup landscape.
Europe has the savings, the talent, and the companies, but not yet the level of domestic institutional backing needed to fully support and scale them.
The Scale of the Opportunity: What Changes If Pension Capital Moves
When you look at the numbers more closely, it becomes clear that this is not just a small allocation gap; it is a very large, system-level opportunity.
If European pension funds were to gradually increase their exposure to venture capital and move closer to US levels, this could unlock around $210 billion in additional capital for the European ecosystem over the next decade. That kind of change would not just improve funding conditions at the margin. It would meaningfully change how companies are financed, how long they can stay private, and how much of their growth can be supported locally rather than relying on foreign investors.
Source: State of European Tech - Atomico
At the same time, current allocation levels across Europe remain extremely low, even in the more developed markets. Pension funds typically invest only a very small fraction of their assets in venture capital, often well below 0.1% of AUM, with some regions allocating almost nothing. This is not because the capital is not there, but because of how portfolios are structured, how risk is perceived, and how slowly institutional behavior tends to change.
When you put these two things together, you clearly see the patterns. On the one hand, Europe has a very large pool of long-term capital held within pension systems. On the other hand, venture capital, despite its role in driving innovation and long-term growth, remains a very small, underdeveloped allocation within those portfolios. That gap is what creates both the challenge and the opportunity.
🎙️ Discussing Europe’s Missing Pension Capital
In our latest Impact Talks conversation, we spoke with Chris Elphick, Head of Venture Capital at UK Private Capital, about how the industry has changed over time and what that shift really means in practice.
One of the key points he makes is that private markets have grown far beyond their original role. What was once seen as a niche part of finance, focused mainly on early-stage venture, has become a much broader system that supports companies at every stage of their development.
Today, private capital plays a visible role in the economy, backing thousands of businesses, supporting millions of jobs, and contributing meaningfully to overall growth. Even the rebranding from “venture capital” to “private capital” reflects this shift, as the industry now encompasses a much broader set of strategies, sectors, and company life cycles.
At the same time, the conversation brings into focus how this growth has been supported. Public institutions like the British Business Bank have stepped in to anchor the market, especially after Brexit, helping to fund emerging managers and attract additional investors.
Alongside this, international capital continues to play a major role in financing UK companies. But when you look more closely, it becomes clear that domestic institutional investors, particularly pension funds, are still largely missing from the picture.
Let’s Continue the Conversation at 0100 Europe
As Europe starts to rethink the role of pension capital in venture, the conversation is no longer theoretical; it is actively shaping how LPs allocate capital across regions. At 0100 Europe, this discussion comes to life in a panel focused on how global investors are reassessing Europe’s position within the broader venture landscape. With capital becoming more selective and performance differences across regions more visible, LPs are taking a more structured approach to where and how they deploy capital, balancing exposure across the US, Europe, and emerging markets.
What makes this conversation particularly relevant right now is the mix of perspectives in the room. Bringing together investors with experience across fund-of-funds, direct investing, impact strategies, and family office capital, the panel reflects the diversity of capital shaping today’s ecosystem.
The discussion goes beyond whether Europe is “catching up” and instead focuses on how it is evolving, where it is becoming competitive, where it still lags, and how LPs are adapting their strategies in response. It is a continuation of the themes explored throughout this newsletter, but grounded in real allocation decisions being made today.