Over the last few issues, EVCJ has been running a series of articles looking at the problems, both real and perceived, with European venture capital. In one of the pieces I made the point that one reason why European institutional investors were so reluctant to invest was because allocation rules were too restrictive, and that governments should address this issue if they were really interested in stimulating early-stage investment.
I recently received an email, from a source who will remain unnamed, challenging this line of argument. His approach was that Europe suffers from a structural weakness which restricts the number of investors who would be interested in committing to European VC.
What Europe lacks is institutions that are large enough to employ a professional investment team but also small enough for venture capital to have an impact on their portfolio. The US, by contrast, has a proliferation of such organisations, in the shape of university endowments and family offices.
The amount of money under management by European endowments is equivalent to around 1% of that in the US. Oxford and Cambridge, the largest university endowments in Europe, wouldn’t even make the top 30 in the US according to the source, although a report dating from 2003 by The Sutton Trust, a UK educational charity, puts them at joint 15th, the only UK universities to even make the top 150. European endowments don’t have a significant allocation to alternative assets in general, let alone venture.
European family offices, meanwhile, are stuffed with ‘old money’, run by third or fourth generations with little interest in illiquid assets. Family offices in the US, because they are more ‘new money’, tend to be more dynamic, with a greater affinity with entrepreneurship.
“The VC industry in Europe is, to a large degree, driven by a lack of long-term investors that are the right size to make venture capital attractive to them,” said the source.
And there’s no point going to other sources for funding. The banks are all regulated by Basel II, whilst insurance companies and pension funds have Solvency II to worry about, both of which restrict the amount of equities they can invest in.
The problem with such institutions is that they are too big, or European venture capital is too small, for meaningful returns to be generated. “It is not that they are especially risk averse, it’s more of an overall structural issue which makes it very hard for them to invest.”
There appears to be no simple solution – changing the investment attitude of endowments could take generations. One idea is to encourage fund-of-funds and gatekeepers to invest more in venture capital, but fund-of-funds are already big backers of European VC so it would take something drastic to get them to up their allocation.
It’s a topic I’m going to be returning to in the September issue of EVCJ, so if anybody has any thoughts on the above – that the European institutional investor community has a structural weakness – and how to encourage investors to back venture capital, feel free to contact me at firstname.lastname@example.org or +44 (0)20 7369 7516, or reply to this article by clicking on the “comment on this story” link at the top right of the page.