Unlocking pension capital for Europe’s strategic autonomy
By Morten Halborg, General Partner & Co-founder, Climentum Capital, Former pension fund executive, August 2025
1. Europe’s trillion-euro blind spot
Europe’s innovation ecosystem is gaining momentum. AI, climate, defence, and resilience tech are rewriting the economic map, and Europe’s startups are increasingly central to that transformation. Despite vast pools of domestic capital, the funding behind Europe’s transformation still flows disproportionately from outside the continent.
Despite managing over €8 trillion in assets, European pension funds invest just 0.01% of their capital into venture, compared to around 10% of U.S. pension capital being channelled, including into European funds (SuperReturn Europe, 2024; Invest Europe, 2023). In the UK, tech startups receive 16 times more funding from foreign pension funds than from domestic ones (British Business Bank, 2023).
This absence is not just felt in early-stage venture - it extends across the financing lifecycle. A recent analysis by Climentum Capital visualizes this gap in a “financial highway” spanning from research and incubators to IPOs. While public and institutional capital is relatively mature at the two ends, research institutions and buyout/infrastructure, there’s a sharp drop-off in the middle. Europe’s early-stage venture and growth equity & debt markets, especially for hard tech and climate tech, remain structurally underfunded. It would have needed additional funding of $75 billion to achieve 80% local funding for growth rounds bigger than $15 million (State of European Tech, 2024).
Source: Climentum Capital
This undercapitalization stifles Europe’s ability to turn scientific breakthroughs into industrial champions. It blocks the path from lab to scale to global markets. And it underscores why institutional capital, particularly pension funds, must play a strategic role in filling the gap and backing the builders of tomorrow.
“Europe’s startups are shaping the future, but without local capital behind them, the returns, economic and strategic, are leaving the continent.”
At a time when the European Commission and the Draghi Report call for bold action to strengthen the continent’s strategic autonomy, long-term competitiveness, and innovation-led growth, institutional investors remain paralysed by legacy risk frameworks. If Europe wants to lead, its pension funds must stop watching from the sidelines, and start investing in the future.
2. The myth of risk aversion
Why the reluctance to act? The typical explanations are familiar: regulatory constraints, illiquidity concerns, internal capability gaps, and a cultural aversion to failure. These are real, but no longer adequate.
As a former pension fund executive, I know what it means to manage risk. But there’s a difference between responsible stewardship and risk avoidance. Early-stage venture capital, particularly in Europe’s maturing ecosystem, offers diversified, asymmetric upside, especially in transformational sectors like climate, deep tech, and industrial resilience.
In truth, the “high risk” label obscures the fact that European VC is becoming better structured, more mission-aligned, and more accessible than ever before. Fund-of-funds, milestone-based structures, co-investment platforms, and public-private capital stacking all help mitigate risk while unlocking exposure.
As the Draghi Report notes, we must shift “from a culture of caution to one of calculated risk” if we are to rebuild Europe’s innovation capacity. That shift starts with how and where we invest.
3. VC: Where small allocations drive strategic impact & outsized returns
VC doesn’t need to dominate a pension fund’s allocation to make a difference. Even a 1–3% commitment can meaningfully enhance long-term performance, offering targeted exposure to high-growth sectors that traditional equities and fixed income often miss.
Capital allocation to VC can be the “cherry on top” of institutional portfolios: modest in size, but powerful in effect. Recent data underscores this. Several pension-linked portfolios report that their VC sleeves have generated 10–20% of overall returns, driven by a handful of breakout companies (Cambridge Associates, 2022).
Crucially, investing in early-stage tech today lays the foundation for the global champions of tomorrow, just as yesterday’s bets shaped the leaders we now take for granted.
In 2010, Europe had just 12 unicorns. As of 2024, that number exceeds 350 (Dealroom, 2024). This surge closely mirrors the growth in early-stage VC investment - up more than fivefold over the past decade (Atomico, 2023). In the first half of 2024 alone, the median early-stage round size rose 44%, signalling both investor conviction and a higher quality of opportunities entering the market.
These are not paper valuations. These are real companies. H2 Green Steel, DeepL, Sunfire, Plan A and many more: scaling globally, building sovereign technologies, anchoring supply chains, and creating jobs and intellectual property in Europe. The flywheel is working.
The conclusion is clear: for pension funds with 20–30 year horizons, the upside potential far outweighs the complexity. Excluding VCl at this stage is not prudence, it’s a missed opportunity.
4. Why now: timing, tools, and tailwinds
What was once a global, software-only focused, SaaS-heavy asset class is now evolving. Today’s VC is increasingly deep tech, hard tech, and climate-first, built around Europe’s strategic priorities: energy resilience, industrial decarbonization, digital sovereignty, and defence readiness.
For pension funds with ESG mandates, VC has never been more mission-aligned. One in three VC euros in Europe now targets companies aligned with the UN Sustainable Development Goals (Atomico, State of European Tech, 2023). Over €53 billion was raised by European startups in 2023 alone, across AI, climate, energy and resilience tech (Dealroom, 2024).
Yet much of this capital still comes from outside Europe, particularly from U.S. and Asian investors. When non-European investors dominate the cap table, core technologies, IP, and even company headquarters often shift abroad. Several standout European startups have already been relocated to the U.S. or China following foreign-led growth rounds.
To retain strategic control over Europe’s innovation base, pension funds and other institutional investors must play a more active role on the cap table - not just for returns, but to safeguard long-term ownership, talent, and industrial relevance.
And the enabling structures are falling into place:
The TIBI initiative in France has channelled €13 billion into ventures through pension-GP coordination (Bpifrance, 2024).
The UK’s Mansion House Compact targets a 10% pension allocation to unlisted equities by 2030 - up from just 0.36% today (HM Treasury, 2023).
Nordic proposals are underway for loss-buffered models designed to mitigate J-curve exposure and reduce diligence barriers.
This is not theory. It’s real, and already underway.
5. A call to action: practical steps, structural reforms
Mobilizing pension capital for innovation won’t happen by accident. It requires clear, coordinated action from the VC industry, policymakers, and pension leadership. Some key levers:
Conscientious boldness: Pension funds must lean in, not lean back, amid Europe’s growing climate, energy, and supply-chain vulnerabilities. Backing innovation is not speculative; it’s strategic.
Adopt a mindset of responsibility: This is not just about generating returns; it’s about enabling Europe to thrive independently in a fractured world.
Pre-validated VC platforms: Simplify diligence and approvals by creating regulatory frameworks for compliant venture structures.
Standardized “prudent person” templates: Harmonize Solvency II-compliant reporting and governance across VC funds, inspired by the TIBI initiative in France.
Regional coordination: A Nordic Capital Markets Union could amplify scale and liquidity, increasing appeal for institutional investors across borders.
Risk-sharing capital stacking: Public capital can serve as first-loss or subordinated equity, enabling pension funds to participate higher in the capital structure, thus reducing risk while retaining exposure.
Reform tax barriers: Reclassify carried interest, streamline capital gains frameworks, and remove distortions in cost-allocation rules.
As the Draghi Report states:
“To succeed, Europe needs to match its rhetoric on sovereignty and sustainability with the capital to implement it.”
6. From inertia to conviction
Europe’s startup ecosystem is not hypothetical. Nearly 600 unicorns have been created; 349 have already been exited (Dealroom, 2024). These numbers are a clear proof of concept for European innovation and venture. This is no longer an emerging asset class. Yet despite this momentum, a significant funding gap persists - leaving many future champions underfunded or entirely overlooked. We’re not just celebrating the unicorns we have; we’re missing the ones we never gave a chance.
VC isn’t a distraction from fiduciary duty, it’s a strategic complement. It offers the long-term, future-focused exposure that Europe’s pension portfolios need to stay relevant amid industrial, environmental, and geopolitical upheaval. This is precisely the kind of capital deployment the Draghi Report calls for, and exactly what VC delivers.
Europe doesn’t have a funding problem, it has a deployment problem. The capital is there. The tools exist. The time is now.
It’s time for pension funds to step in, step up, and help build the Europe we all want to live in.
