European and Italian institutions investing in VC: why (and how) pension funds can help startups

NewsFromThePlatform | February 28th, 2018

Public financing accounts for 18% of European VC funding. In three years, Italian pension and insurance funds will be able to provide startup s with 1 billion Euros

Europe’s economy is about the same size as that of the US, but our capital markets are only half their size. Our corporate bond market is a third of the size; our venture capital markets a fifth. US SMEs get about five times more funding from capital markets than in Europe.” These words were spoken by European Commissioner Jonathan Hill at Bruges European Business Conference in March 2016 and illustrate how long the road still is for the Old Continent in terms of capital markets funding.

Despite the European market having 510 million potential customers, European startups are struggling to grow at the pace of US ones. The reason, as shown in a report by Jacques Delors Institute of Berlin, seems to be a “smaller” VC market, “less attractive for investors and with many barriers to cross-border investment.” Yet, policy tools to make this market grow already exist – i.e. direct public funding and tax incentives for investors – and have both been widely used. In the last ten years, government agencies have provided 18% of total VC funding. The main European public player in this field is EIF, acting on behalf of EIB, the European Commission and in some cases single States. National promotion agencies also play a key role: they include Banque Publique d’Investissement (Bpifrance) in France, the British Business Bank (BBB) in the United Kingdom, Kreditanstalt für Wiederaufbau (KfW) in Germany, and Cassa Depositi e Prestiti (CDP) in Italy.

What has been missing so far is a closer cooperation between public players. And as for taxation, although the various States have adopted numerous incentive plans to reduce VC investment risk, there is no common regulatory framework that ensures transparency and non-discriminatory treatment for transnational investors.

In a nutshell, policy tools exist but are not bearing the expected results because there is no common European regulation. Looking in particular at Italy and France, according to the Hi-Tech Startup Observatory of the Politecnico School of Management in Milan, Italian institutional funding of startups amounted to 63 million Euros, while in France it was 624 million Euros (and 127 in Spain). The French landscape has become very dynamic thanks to the launch of the Public Investment Fund (managed by BipFrance and strongly supported by President Macron), which manages a record funding of 10 billion Euros.

In addition to direct public funding, there are other institutions that could invest in venture capital: insurance funds and pension funds. According to Invest Europe, which is the association that represents private equity and venture capital at a European level, pension funds are one of the largest sources of VC financing and have contributed to 30% of European startup funding over the past three years. They are so important that Invest Europe has even written a guide for pension funds that want to approach this kind of investment.

In the meantime, other subjects are experimenting with different ways to incentivize cash flows from pension funds into startups. In the United Kingdom, for example, Joe Schorge and Chris Wade, the founders of Isomer Capital, have announced the launch of a tool for pension funds that want to invest in European VC. In Switzerland, Nest pension fund has decided to invest in startups through the platform investiere.ch – leader in the country, with a track record of over 50 rounds. “Just to involve the 0.5% of European pension funds would be enough to change the face of Italian venture capital and therefore its whole ecosystem of innovative startups,” as Fabio Gallia, CEO of Cassa Depositi e Prestiti, has recently stated.

However slowly, some of the Italian insurance funds are making some steps forward. The most active are Cassa Forense and Inarcassa (architects and engineers), which at the end of 2015 had already announced being ready to invest 20 million Euros in the fund of funds launched by CDP to support startups. Last June, Cassa Forense also signed an agreement with EIF to support, together, the growth of European SMEs. Cassa Forense will take part in the project as “Anchor Investor” in a fund of funds organized and managed by EIF, with the aim of selecting the best European strategies for SMEs funding – i.e. financing companies that have under 500 employees (the small ones) and up to 3,000 employees (the medium ones) – and the best venture capital initiatives.

That is not all. In these very days, the Ministries of Economy and of Economic Development are supposed to be working on a proposal to promote non-bank financial support for Italian companies – considering in particular pension and insurance funds. Briefly, the proposal provides that 5% of the assets of these institutions (we are talking about 12 billion Euros) goes into closed funds that invest in Italian SMEs. Within 4 years, 10% of these qualified investments will be allocated to shares of venture capital funds, or closed funds that invest at least 75% of asset value in seed financing, startup financing, early stage financing, or expansion financing of unlisted companies residing in Italy, EU States or European Economic Area States that have a stable organization in Italy. One billion Euros in three years for Italian venture capital, which will help our country to get closer to its cousin, Spain, that has already reached those numbers.