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03.1

Limited Partners

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European venture capital fundraising continued its upward trajectory in 2019, setting another record year by closing on $16.5B of new funds. Preliminary results for 2020 are also encouraging with fundraising activity in the first six months of 2020 slightly ahead of H1 2019 ($7.8B versus $7.5B) and very much on track to break 2019's full-year total.

Fundraising Record


$16.5B
new funds raised by VCs in 2019

Overall VC funds raised ($B) per year

Note:
Taken from the European Data Cooperative, developed by Invest Europe. EDC data converted at EUR:USD of 1:1.1198, the rate on 30 June 2020.

Many of Europe's leading VCs have raised new vehicles to continue investing in Europe's next generation of founders.

European Venture Capital funds raised in 2020 by fund size and country

Source:

This buoyant fundraising environment is also underpinned by robust Limited Partners ('LP') sentiment, which does not appear to have been negatively impacted by the Covid-19 pandemic. 94% of LP respondents have either increased or maintained their appetite to invest in the European venture asset class, while just 6% of LPs stated their appetite has decreased since the onset of the pandemic. The number of LPs with an increased appetite exceeds those with a decreased appetite by greater than 4x.

Since the start of the Covid-19 pandemic, has your appetite to invest in the European venture asset class changed?

Source:
Note:
LP respondents only.

appetite for European Venture


94%
of LP respondents have either increased or maintained their appetite to invest in the European venture asset class

Source:

The strong level of continued LP commitments to European venture is also highlighted by LP willingness to keep investing actively in 2021. 93% of LPs surveyed expect to remain active in the next 12 months, while 89% have invested in the past 24 months.

Have you invested in VCs in Europe in the past 24 months and are you considering investing in a VC fund in the next 12 months?

Source:

Legend

  • Yes
  • No
Note:
LP respondents only.

The ecosystem's maturation is also reflected in the scaling up of European VC funds. The share of total funds raised through vehicles of greater than €250M continues to increase and represented close to 60% of the total in the first six months of 2020, compared to 36% in 2016. This has been driven primarily by the growing number of European funds raising in excess of €500M, which accounted for 43% of all VC funds raised in Europe during the first half of 2020, versus just 10% in 2016. Over a period of 18 months since the start of 2019, 13 funds sized at more than €500M have been closed, raising over $7.4B, compared to just 7 funds raising $4B over the preceding three years.

Funds > €250M


60%
of total funds raised in H1 2020

VC funds raised ($M) and number of VC funds closed per year by fund size (€M)

Legend

  • < €25m
  • €25 - 50m
  • €50 - 100m
  • €100 - 250m
  • €250 - 500m
  • >€500m
Note:
Preliminary H1 2020 figures. Taken from the European Data Cooperative, developed by Invest Europe. EDC data converted at EUR:USD of 1:1.1198, as of 30 June 2020. The data shows incremental amounts in each year for venture funds, not only final closing.

This is, perhaps unsurprisingly, being chiefly driven by funds raised by follow-on VC funds, where the median fund size has nearly tripled since 2016 to reach a record $133M in H1 2020. The median size of first-time VC funds closed in Europe in the first half of 2020 was $60M, in line with the prior year, though this represents a material step-up compared to the multi-year trend observed prior to 2019.

Follow-on VC


$133M
median fund size in H1 2020

Median VC fund size ($M) at final closing per year by fund type, 2016 to H1 2020

Legend

  • First-time VC
  • Follow-on VC
Note:
H1 2019 figures are preliminary. Taken from the European Data Cooperative, developed by Invest Europe. EDC data converted at EUR:USD of 1:1.1198, the rate on 30 June 2020.

It is notoriously challenging to raise a fund as a first-time manager in Europe. One reason, among many, is the fact that most LPs are primarily focused on capital allocation to established or emerging managers, not first-time fund managers. It is not surprising that only a small proportion of LP respondents expressed a preference to support first-time fund managers over other, more established managers.

What type of fund managers do you normally invest in?

Source:
Note:
LP respondents only.

Raising the second fund has been easier in a number of ways. First of all, we have certainly seen a higher interest and appetite for the asset class as such, as even more conservative investors are anticipating strong returns in the sector. Moreover, we have been able to show that our investment strategy and our focus on transformative technology companies across a breadth of different sectors in B2B is playing out and is reflecting in a strong portfolio performance.

Jeannette zu Fürstenberg

La Famiglia

Founding Partner

Predictably, LPs cite track record as by far the most important consideration when evaluating a prospective general partner ('GP'). This is followed, by some distance, by the overall investment strategy of the fund. In part, this presents a chicken-and-egg problem for prospective first-time fund managers, knowing that the ability to demonstrate a strong track record is such an important factor in building traction with potential LPs.

What are the most important criteria when assessing a prospective GP?

Source:
Note:
LP respondents only. The responses to this question have been aggregated based on how respondents answered the following question: "What type of fund managers do you normally invest in?"

While historical track record remains the most important measure when evaluating a GP, its ability to generate consistent returns in the future is what matters ultimately.

While historical track record remains the most important measure when evaluating a GP, its ability to generate consistent returns in the future is what matters ultimately. In our views, performance is generated by investment teams that can work successfully over the long term. We aim to support the right team, with an appropriate fund size and a clear strategy to execute on. People are at the very center of our analysis and given the long term relationships that we aim to build, we like to see consistency in the core team complemented by a well-defined succession plan for the younger generation of up and coming investors.

Maurizio Arrigo

Pictet Alternative Advisors

Head of Private Equity

Another way to measure the maturity of the European VC asset class is the share of funding from government agency sources. This percentage has historically been materially higher than that of the more mature US ecosystem, though lower than that in China. By this measure, there is clear evidence of material progress. Looking at total VC fundraising for more recent vintages (2018-2019), the share sourced from government agencies has declined to record lows of less than 20%. Interestingly, the decline has been even more pronounced for first-time funds than for follow-on funds.

Evolution of share of government funding in Europe (%), 2015-2017 versus 2018-2019

Legend

  • 2015 to 2017
  • 2018 to 2019
Note:
Taken from the European Data Cooperative, developed by Invest Europe. Excludes Unclassifieds.

In absolute terms, the total level of government agency funds invested into European VCs topped $2.5B for the first time in 2019, increasing from $1.1B in 2015. Interestingly, while government agencies have materially ramped their investment into follow-on funds, growing almost 3x between 2015 and 2019, the sums invested into first-time funds have not seen the same consistent expansion.

Evolution of government funding ($M)

Legend

  • First-time VC funds
  • Follow-on Funds
Note:
Taken from the European Data Cooperative, developed by Invest Europe. EDC data converted at EUR:USD of 1:1.1198, the rate on 30 June 2020.

It can, of course, be a mistake to make assumptions about the overall ecosystem without first understanding the numbers at a more granular level. In this context, it's important to understand that the relative maturity of the venture capital asset class differs markedly at the country or sub-regional level. The UK, for example, is unquestionably the most mature European venture capital market. Not only is the level of 'dependency' on government agency funds much lower in places such as the UK (8%) and Nordic countries (10%), but the decline in the share of funds raised from these sources is also falling much faster than elsewhere. The decline in the DACH region, home to many of Europe's leading early-stage VCs, is also particularly pronounced. On the flip side, in the less mature corners of Europe - Southern Europe (32%) or the CEE (37%) - there is an understandably higher level of dependence. Nevertheless, the relative share of funding from government agencies is declining across the board, with the notable exception of France and the Benelux, where government institutions have been long-time and very active supporters of local VCs.

Evolution of share of government funding by region (%), 2015-2017 versus 2018-2019

Legend

  • 2015 to 2017
  • 2018 to 2019
Note:
Taken from the European Data Cooperative, developed by Invest Europe. Excludes Unclassifieds.

What is growing increasingly clear is that sophisticated capital allocators are deploying into European VCs in record numbers, driving material shifts in the mix of sources of LP funding. This changing dynamic is helping to build an increasingly diversified LP stack for Europe and a robust foundation for the future of European venture capital as an asset class, given the long-term horizons over which these investors enter into relationships and allocate capital. Notably, the most recent available data shows a large, sustained and growing allocation of investment from pension funds, insurance companies, fund of funds, and endowments and foundations.

VC funds raised ($M) per year by LP type, 2015-2019

Legend

  • Academic institutions
  • Banks
  • Capital markets
  • Corporate investors
  • Endowments and foundations
  • Family offices
  • Fund of funds
  • Government agencies
  • Insurance companies
  • Other asset managers (including PE houses other than fund of funds)
  • Pension funds
  • Private individuals
  • Sovereign wealth funds
  • Unclassifieds
Note:
Taken from the European Data Cooperative, developed by Invest Europe. EDC data converted at EUR:USD of 1:1.1198, the rate on 30 June 2020.

VC Funds raised


$59B
VC funds raised over the past 5 years

Source:

The speed at which different types of LPs are ramping their commitments to European VC is reflected in the relative size of aggregate commitments in 2019 versus the trailing average of commitments over the four prior years. Looking at the data in this way gives a simplified view on which LP types are growing in relative terms versus the overall increase in funds raised, and those which are growing slower or declining in relative terms. Encouragingly, insurance companies, pension funds, and endowments and foundations made the greatest relative increase in their allocations to European VC.

Funds committed to VC funds by LP type (multiple), 2019 versus average per year 2015-2018

Legend

  • Multiple (2019 versus. average 2015-2018)
Note:
Taken from the European Data Cooperative, developed by Invest Europe. Excludes Unclassified.

While there is still some way to go before pension funds become the largest overall source of allocation to European VCs, the data would suggest that there is a realistic path to this happening if trends continue to evolve in line with recent years. In 2019, the most recent full year for which this granularity of data is available, pension funds continued to build their exposure with another record high commitment of $1.5B to European VCs. That being said, in 2019, for every dollar raised from a pension fund, European VCs on average raised around $1.65 from government agencies.

Funds committed ($M) to VC funds by LP type (>$500M), 2015-2018 versus 2019

Legend

  • VC Funds raised 2019
  • Average VC Funds raised 2015-2018
Note:
Taken from the European Data Cooperative, developed by Invest Europe. Excludes Unclassified. EDC data converted at EUR:USD of 1:1.1198, the rate on 30 June 2020.

There are large differences on a sub-regional level when it comes to the scale of VC fundraising. The UK, already Europe's largest and most important country in terms of VC fundraising, is on track for another record year in 2020. Six months into 2020, VC funds raised have already exceeded more than 80% of the total raised in either 2019 or 2018.

VC funds raised ($B) per year by GP region

Legend

  • 2016
  • 2017
  • 2018
  • 2019
  • H1 2020
Note:
Taken from the European Data Cooperative, developed by Invest Europe. EDC data converted at EUR:USD of 1:1.1198, the rate on 30 June 2020.

The mix of the source of VC funds raised by LP type varies greatly across Europe. The UK, as the most mature VC market, also has the most diversified set of LPs backing its GPs, including large shares of total funds raised coming from pension funds, funds of funds, and endowments and foundations. By contrast, the share of funding from corporate investors is higher as a percentage of total funds raised by GPs in the DACH region compared to any other region. The Nordics, as highlighted in earlier versions of this report, have the highest share of funds raised from pension funds in Europe. In fact, Nordic VCs raise a greater share of their funds from pension funds than from any other LP type, including government agencies.

VC funds raised ($M) by GP region and LP type, 2015 to 2019

Legend

  • Government agencies
  • Corporate investors
  • Private individuals
  • Fund of funds
  • Pension funds
  • Family offices
  • Insurance companies
  • Other asset managers
  • Banks
  • Endowments and foundations
  • Capital markets
  • Sovereign wealth funds
  • Academic institutions
Note:
Taken from the European Data Cooperative, developed by Invest Europe. EDC data converted at EUR:USD of 1:1.1198, the rate on 30 June 2020.

Our positive view on the European VC landscape has been reinforced in recent years as we witnessed the emergence of a growing number of start-ups led by experienced entrepreneurs able to scale their business internationally. This is now confirmed from many angles by increased capital inflows and deal activity.

Sofina has been an investor in VC funds for more than 30 years. We remained focused on the leading US GPs for most of this period because the European venture ecosystem did not produce enough successful venture-backed companies despite the abundance of well-educated entrepreneurial talent. We were hoping for improvement and began to see the tide turning about five or six years ago. We invested in a selection of the best European VC firms where we found investment talent and processes comparable to our US benchmarks.

Our positive view on the European VC landscape has been reinforced in recent years as we witnessed the emergence of a growing number of start-ups led by experienced entrepreneurs able to scale their business internationally. This is now confirmed from many angles by increased capital inflows and deal activity. The size of financing rounds is growing and valuations are following the global rising trend. We also see more engagement from communities to support technology and innovation. It helps make start-up careers more visible and more attractive for young talented professionals. Another significant development is the renewed interest of leading US VC investors who are raising their game in Europe and building local teams to support their investment activity. Competition is heating up and the pandemic did not materially change the picture. We know that the VC industry will face cycles but we are confident in its long-term positive trend.

Xavier Coirbay

Sofina Group

Executive Committee

European VC is overwhelmingly funded by European LPs, as clearly highlighted by analysing the source of funds raised by LP region. As the ecosystem has matured, the level of investment from LPs from outside Europe, in particular in the US, has increased. Nonetheless, as the near 50% drop in commitments between 2018 and 2019 demonstrates, there is still notable volatility. The long-run trend, however, is clearly trending positively in terms of securing LP allocation from outside the region.

Funds committed ($B) to VC funds by LP region per year, 2015 to 2019

Legend

  • Europe
  • Asia & Australia
  • North America
Note:
Taken from the European Data Cooperative, developed by Invest Europe. EDC data converted at EUR:USD of 1:1.1198, the rate on 30 June 2020.

Drilling down more granularly into the LP types driving investment from North America into the European VC asset class reveals that the decline in commitments in 2019 is primarily driven by lower investment from fund of funds, and endowments and foundations. North American pension funds, by contrast, are backing European VCs at record levels. The volatility in absolute amounts is likely explained by the fact that the timing of new fundraises by larger, established European VCs is still significant enough to drive a material impact from one vintage year to the next.

Capital invested ($M) by North American LPs by type

Legend

  • Pension funds
  • Corporate investors
  • Insurance companies
  • Endowments and foundations
  • Fund of funds
  • Other asset managers (including PE houses other than fund of funds)
  • Family offices
  • Private individuals
  • Academic institutions
  • Banks
  • Sovereign wealth funds

It is always interesting to compare the scale of European VC to its sister asset class of Growth and Buyout. As one would expect, European buyout is a much larger asset class, with buyout funds typically raising in multiples of 5-6x more than European VCs. It is more noteworthy, however, to observe that European growth funds have not scaled in terms of funds raised at the same pace as the underlying European tech ecosystem, nor compared to European VCs that invest before them. While European VCs and buyout firms are on track to raise record sums in 2020, European growth funds look set to record the lowest total in recent years.

Funds raised ($B) by fund type per year

Legend

  • Buyout funds
  • VC funds
  • Growth Funds
Note:
H1 2020 figures are preliminary. Taken from the European Data Cooperative, developed by Invest Europe. EDC data converted at EUR:USD of 1:1.1198, the rate on 30 June 2020.

Though the relative scale of European buyout funds is approximately 5-6x larger than European VCs, there is a much greater variance in the relative size of commitments from key LP types. As an example, pension funds have invested more than $112.3B cumulatively into European buyout funds between 2015 and 2019, but their commitments to European VCs total just $3.6B over that same period, a relative multiple of more than 31x. Multiple factors explain this gap, including misconceptions around European VC performance, risk appetite, as well as the perception of the difficulty of putting large sums of capital to work. These hurdles are slowly being eroded.

Funds committed ($B) to VC and Buyout by LP type, 2015 to 2019

Pension funds allocation


31x
more capital committed to European Buyout funds than European VCs

Source:

To get a glimpse at how the geographic sources of LP capital might evolve as European venture capital continues to mature, it's interesting to compare the relative share of funds raised by European buyout firms by LP region. European buyout funds have succeeded in raising a far greater share of funds from North America and Asia compared to European VCs.

Funds raised by fund type and LP region, 2015-2018 versus 2019

Legend

  • Europe
  • Asia & Australia
  • North America
  • Rest of the World
Note:
Taken from the European Data Cooperative, developed by Invest Europe. Excludes Unclassified. Total may not sum to 100% due to rounding.

When all is said and done, European venture capital as an asset class is judged on its performance. In this regard, European venture capital continues to make huge progress. According to the latest benchmarks from Cambridge Associates, European venture capital now outperforms all of its key comparables on a one, three, five and 10-year horizon. Not only that, but the spread has increased versus US venture capital and also European private equity. The relative returns versus a European public market index are also stark. European venture capital continues to prove it can be a highly attractive asset class for capital allocators to build exposure. That is if they can access the right managers, given the concentration of the greatest returns in a small number of outperforming managers.

Horizon pooled return (net) by fund index, June 2020

Legend

  • Europe Developed Venture Capital Index
  • Cambridge Associates US Venture Capital Index
  • Europe Developed Private Equity Index
  • MSCI Europe Index
Note:
Data is as of 30 June 2020.

The development of Covid-19 has also demonstrated the resilience and overall belief in the market, and its attractiveness for investors as a long-term investment opportunity.

The European market has matured considerably over the past years. The region today has several leading global VCs but a new generation of funds have also sprung to life, also thanks to a larger pool of former entrepreneurs. Ecosystems have therefore multiplied in depth and across geographies and selection wise, LPs are today met with a much higher level of sophistication. As the overall ecosystem has developed, GPs have also become bolder and held on to companies much longer and by doing so, they have supported founders longer throughout their journey – leading to great outcomes for all parties involved. The development of Covid-19 has also demonstrated the resilience and overall belief in the market, and its attractiveness for investors as a long-term investment opportunity.

Andreas Thors

Partners Group

Industry Value Creation