The inaugural academic year of the Central Banking and Banking Supervision (CBBS) Executive Education Programme, launched in October 2023, has successfully concluded in July 2024. This milestone marks a significant achievement in the partnership between...
Invest Europe recently published its latest data on venture capital (VC) fundraising on the continent (Figure 1). Among other things, the analysis shows the proportion of new capital raised by VCs that came from public investment banks (PIBs) and similar institutions. After a few years of decline, the contribution by government agencies jumped to 38% in 2023, a proportion not seen since the financial crisis. A 40% decline in total fundraising suggests that the increased public share is due to less private capital going into the asset class. The data prompt at least two reflections in relation to Europe’s ambitions for the twin transition.
Figure 1: Venture capital fundraising in Europe and the contribution of public agencies
On the one hand, it should be clear by now that public agencies, in particular public investment banks (PIBs), play a crucial role in Europe’s innovation market, and they will therefore be at the centre of implementing the transitions. This is the case not only because the European market is still less developed than the American one but also because it structurally lacks some of the key institutions that funnel capital to VC across the Atlantic, in particular multi-billion university endowments and prominent private defined-contribution pension schemes. Today European pension funds invest less than 0.02% in VC and growth equity, 1/100th compared to their American counterparts. In the United States, pension funds and endowments fuelled the American VC and private equity markets. They provided capital but also established best practices in investing in these asset classes in a way that is consistent with their risk-reward profiles as institutional investors (Lerner 2009). Who can do this in Europe? At both the national and supranational levels, PIBs have taken a leading role in this industry, aiming to catalyse private capital (Moretti 2024). The case of VC is perhaps an extreme one. However, it shows the reach and sophistication these public institutions can have. As Europe must figure out how to catalyse as many resources as possible for the transitions, it is inevitable that PIBs will be at the centre of developing and deploying the necessary tools to create the combination of risk protection and incentive alignment that can unlock Europe’s private capital. This means that strengthening the capacity of these public institutions is a strategic priority across Europe. It will be necessary to intensify structured best-practice sharing between national institutions and to promote harmonisation and refining of investment tools that can attract private capital for the transitions as efficiently as possible.
On the other hand, the shortfall in private funding highlights that a European capital markets union (CMU) is no longer delayable. Scaling up European innovation requires access to Europeans’ savings. European leaders are finally becoming more aware of the urgency (see the Letta report and the op-ed by the leaders of France and Germany). The problems deriving from the deep fragmentation of European financial markets had emerged already in the aftermath of the financial crisis but have so far not been enough to lead policymakers to find an agreement to overcome the obstacles – admittedly many – to this project. Today, however, it is becoming clear that the CMU will be a fundamental piece of the twin transition puzzle. It is not a separate project but a core enabling one. The benefit of further integrating the single market would be tangible for both innovative companies and investors. European start-ups would have access to much larger pools of capital, which would facilitate their fundraising process and strengthen their bargaining power with investors. At the same time, harmonisation would also make it easier and cheaper for investors to back European innovative companies. Today, national laws create a puzzle of rules on critical elements such as deal terms, fund structures, investment instruments, administrative processes, and equity-based compensation. Simplifying this landscape would remove a significant practical obstacle to attracting foreign investors (including American ones) and facilitating the movement of capital among European countries.
Funding the twin transition is quickly becoming the priority for European industrial policy and its strategic autonomy. Policymakers should see the realisation of the CMU and the role of PIBs in it as the main complementary levers to achieve it.
Kortum, Samuel and Josh Lerner 2000. “Assessing the Contribution of Venture Capital to Innovation.” The RAND Journal of Economics, Vol. 31, No. 4 (Winter, 2000) https://doi.org/10.2307/2696354
Mertens, Daniel, Matthias Thiemann and Peter Volberding (eds). 2021 The Reinvention of Development Banking in the European Union: Industrial Policy in the Single Market and the Emergence of a Field. Oxford: Oxford University Press. https://doi.org/10.1093/oso/9780198859703.001.0001
