Highlights for LPs

Limited Partners ('LPs') are a critical foundation of the European tech ecosystem as the ultimate source of capital that flows into the region's startups and scaleups. It is thanks to increased allocation from a growing and increasingly diverse set of LPs that European VCs have succeeded in raising record amounts of funding.

2021 represented another record year for European VC fundraising, hitting over $19B for the year. This robust momentum continued during the first half of 2022, hitting over $10B in the first six months of the year and putting 2022 on track to match or potentially exceed 2021's record-breaking year.

These increased sums have been driven by the ability of many VCs to raise increasingly larger vehicles, including a (very) small number of billion-dollar funds, such as Northzone X and EQT Growth I. While European VCs have raised record sums, the totals remain tiny in comparison to the US. On the other side of the Atlantic, VCs have typically raised 2.9x more capital per year over the past five years than their European counterparts, based on analysis from PitchBook.

The median VC fund closed in 2021 hit $64M, continuing a multi-year trend that has seen average fund sizes steadily increase. Interestingly, the median first-time fund raised in 2021 jumped to $66M and, in doing so, actually exceeded the median follow-on fund raised during the same period for the first time on record.

It's hard to say if this is a trend that may persist, but it'ss certainly illustrative of the potential to achieve positive outcomes for first-time fund managers that have the determination and persistence to withstand an often long and winding path to a final close.

Furthermore, there are definite differences across geographies, whereby Germany, Austria and Switzerland (DACH), and the UK & Ireland have a median VC fund size nearly double the size of the other European regions. This is perhaps less surprising given the relative maturity of these ecosystems, which has allowed them to raise larger successive funds.

Regardless, the increase in fund sizes speaks to the larger opportunity set available in Europe. As strong European companies become more numerous, it is crucial that European VCs and thereby European LPs have the necessary funding to capitalise on these opportunities.

The European VC asset class remains primarily funded by European LPs - this holds true in both absolute and percentage terms. European LPs are overwhelmingly the largest source of European VC funds raised, having stepped up their contribution annually, with the exception of 2020.

At the same time, backing from US LPs has been consistent, though remains a small share of overall European VC fundraising. Asia & Australia remains a largely untapped market for European VCs with only a fraction of overall VC funds raised from LPs in the region.

The challenge of a congested fundraising market has been a key theme of 2022, reflected in 59% of responses from LPs when asked to highlight challenges they have experienced in relation to their VC investment programme and strategy in the past 12 months.

Product proliferation within LPs' existing GP portfolio has compounded the challenge of managing allocations - an issue highlighted by 31% of respondents. This has also been exacerbated by internal resourcing constraints, where LPs lack the bandwidth to manage their pipelines, as well as liquidity challenges created by a lack of distributions from existing commitments.

Interestingly, only 14% of LP respondents cited challenges related to performance and even fewer (8%) highlighted challenges arising from the so-called denominator effect, where markdowns in the valuations of certain asset classes cause other allocations in their portfolios to be overweight vs. target allocations.

The strength of LP commitment to the European venture asset class is underlined by the fact that 93% of LP respondents expect to maintain or increase their allocation over the next 12 months. While 40% of LP respondents state an intention to increase their European allocation, only 7% of respondents are expecting to see their allocation decrease over the coming year.

LP appetite to invest in the European venture asset class remains. Though a small number of LP respondents to our survey (8%) report a decreased appetite compared to 12 months ago, we see more than 30% noting they have an increased appetite.

The largest share of respondents (almost 60%) say that their appetite remains unchanged during the last year, which itself has been an important year in further building LP appetite to commit to European VC.

Breaking apart LP sentiment by type, government agencies come across as most bullish in terms of their appetite for the European venture asset class, while the sentiment of pension funds is the most conservative. The share of respondents stating that their appetite has decreased is low or non-existent across different types of LP.

While government agencies form the bedrock of most regional entrepreneurial ecosystems, the makeup tends to vary greatly across different regions. The proportion drops off in more mature ecosystems such as the UK & Ireland, France & Benelux, and Germany, Austria and Switzerland, which are all between about 12 to 25% vs. the 39% to 56% seen in Southern Europe and Central and Eastern Europe.

Family offices are a presence across most ecosystems, usually around 9-12% of regional funding. However, the UK & Ireland and Central and Eastern European regions are outliers, with only 5% of UK & Ireland's ecosystem funding coming from this source followed by only 3% of CEE's.

Corporate investors have invested heavily in Germany, Austria and Switzerland, France & Benelux, and Central and Eastern Europe - between about 15-23% of each of these ecosystems' total funds raised.

When asked about the one change LPs would like to see in order to improve the health of the European tech sector, roughly a third of respondents voted for getting a broader variety of LPs involved in investment. This is significantly ahead of the other response options, including increased VC activity.