EU launches venture capital mega-fund to attract heavy-hitting investors

The fund of funds is designed to enable the rapid growth of innovation by boosting the amount of risk capital available to promising European companies — which currently is small change compared to huge VC funds in the US and China. It was launched by the European Commission and the European Investment Fund (EIF) following a proposal made by the European Commissioner for Research, Science and Innovation, Carlos Moedas, in 2015.

By leveraging the €2.1 billion to trigger up to €6.5 billion of investment from institutional investors such as pension funds, the intention is to significantly increase the VC funding available to European start-ups and scale-ups. The six funds will each have 12 months to raise their share of the €2.1 billion, and the first two funds to sign on, Isomer Capital and Axon Partners Group, have hit the ground running.

Joe Schorge, founder and managing partner of UK-based tech VC firm Isomer Capital is confident of hitting their funding target of €150-€250 million — and thinks that the overall goals are realistic.

‘Last year, about €7 billion was invested by venture capital into Europe, a bit less than 20% of the US figure, and a similar number of companies are founded each year in the US and Europe,’ he said.

Meaningful impact

‘€2.1 billion raised is realistic and will have a meaningful impact on the early-stage VC industry,’ explained Schorge. ‘That’s important, as it will be deployed over four or five years and work out at about €500 million per year. It’s really an economic lever — funding many innovative businesses and inspiring other investors.’

According to Schorge, success for the fund of funds will be in providing a lower-risk way of accessing this market for risk-averse institutional players.

‘The highly opportunistic and entrepreneurial way new technology-enabled companies are created, it’s completely unlike anything a pension fund manager would normally see,’ said Schorge. ‘So part of what we’re doing is creating a fund which has the risk controls, rigorous portfolio management, and the wide level of diversification they need. The fund can handle large investments, and is also a conduit to local expertise and early-stage innovation.’

Also expected to sign agreements this year are VentureEU’s other fund managers — Aberdeen Standard Investments, LGT, Lombard Odier, and Schroder Adveq. The cornerstone investment fund they will share is made up of €200 million from Horizon 2020’s InnovFin Equity initiative, €105 million from COSME (Europe’s programme for small- and medium-sized enterprises), and €105 million from the Juncker Plan’s European Fund for Strategic Investments.

Also inking the agreement, Spanish international strategy and capital firm Axon Partners Group focuses its VC funding on technology and also specialises in connecting Europe with emerging markets. Axon president Francisco Velázquez says their Latin American and South Asian market connections will leverage investment outside of European circles, with €120 million of investment already committed and a target of €500 million.

‘One good example is Latin American pension funds and family offices. They are very interested in the project, and there is a lot of appetite for that kind of investors to get into the European technology and venture story because the average returns are getting better and better, and are already above (those in the) US,’ said Velázquez.

Start-ups

Once the selected six funds raise €2.1 billion of private investments, this will then be used to leverage stakes in other investee funds and cover projects in at least four EU countries each, giving an estimated 1,500 European start-ups and scale-ups access to risk capital. The hope is this could boost the number of so-called unicorns in Europe — companies with a market valuation higher than $1 billion US (€815 mn).

Velázquez says that the growth of scale-ups and unicorns was for a long time challenged by a European market in need of reforms to simplify business for entrepreneurs, but believes the limited amount of venture capital available to European innovators is now the biggest thing holding back their growth. There were just 26 unicorns in the EU at the end of 2017, compared to 109 in the United States and 59 in China.

‘Access to capital is the name of the game. If you don’t have access to larger VC funds, you’re always going to target being acquired or say, “I have to go to the US to grow,” instead of positioning to be a unicorn here,’ said Velázquez.

‘Europeans have shifted towards entrepreneurship, with the support as well of government reforms,’ he said. ‘Tech in the EU is better than anywhere else in the world, we have top universities — especially for engineering — and the market is big. The problem is the underfunding. So the challenge is to make the VC industry larger, and for that we will have to work with the (European) Commission, institutional investors and corporates to prove the case.’

Pension funds

With its Investment Plan for Europe aimed at removing barriers to investment, together with new venture capital investment rules, the European Commission intends to make it easier for fund managers of any size to operate and deal with a wider range of investors.

A new EU requirement from January 2017, which obliges workplace pension funds to take environmental, social and corporate governance aspects more into account as part of risk management, could also encourage European pension fund investments.

And Schorge says European pension funds deciding to invest even a tiny portion of their assets in local VC would be a game changer, easily allowing the EU to match the US for risk capital.

‘If we’re able to increase participation of institutional investors globally — certainly notwithstanding the European institutional investor community — then we will generate a lot of success.’

Originally published on Horizon.