Europe’s Long-Term Capital: Bridging the Gap Between Savings and Growth

2 hours ago

3 min read

Europe has enormous pools of long-term savings. Yet European startups, scaleups and transformative infrastructure projects frequently struggle to access the growth capital they need.

At first glance, this may seem paradoxical. If both the capital and the investment opportunities exist, why does the connection between the two remain so weak?

The answer lies partly in a market failure, but also in a significant information and experience gap.

When long-term capital meets unfamiliar risk

Pension funds are naturally long-term investors. Their investment horizons can, in principle, align well with the long-term nature of venture and growth capital.

Yet these asset classes often fall outside pension funds’ traditional risk appetite, internal expertise and established investment processes. The perceived risk is high, returns are typically realised over a long time horizon, and evaluating fund managers and underlying investments requires specialised knowledge that many institutional investors have had little reason to develop.

This creates a circular problem.

When pension funds remain largely outside the market, they do not build the experience, data and track record that would allow them to assess these investments with greater confidence. At the same time, without sufficient institutional capital, Europe’s venture and growth capital market develops more slowly and remains dependent on a relatively narrow investor base.

The result is not simply a shortage of capital or investment opportunities. Instead, there is a structural gap between the characteristics of Europe’s long-term capital and the risk profile and investment structures offered by the market.

The challenge is therefore less about creating more capital and more about making existing capital better able to connect with investment opportunities.

Changing the risk-return equation

Simply encouraging or requiring pension funds to allocate more capital to higher-risk assets may not be enough.

Where current risk perceptions, expertise or investment constraints prevent greater allocations, a more effective approach may be to change the risk-return profile of the investment rather than asking investors to accept a fundamentally different level of risk.

This is where guarantees and other risk-sharing instruments can play a catalytic role.

An EU-backed guarantee could absorb or share a defined part of the investment risk, making an allocation to venture or growth capital more compatible with the risk appetite of long-term institutional investors.

Crucially, such a guarantee would not need to eliminate market discipline.

Fund managers would still need to select investments on a commercial basis, while investors would remain exposed to investment performance. The guarantee would instead address a specific part of the risk that currently acts as a barrier to entry.

In this way, public support would help unlock private capital without replacing the role of private investors.

Building confidence alongside capital

There is another important dimension: credibility.

For pension funds entering an unfamiliar asset class, the value of an EU-level structure would not only come from the financial protection provided by a guarantee.

Europe already has highly credible institutions with extensive experience in equity financing, fund selection and cooperation with private fund managers. Their involvement could provide professional validation, governance and access to expertise alongside the risk-sharing element.

This matters because the barrier is not purely financial. Institutional investors also need the knowledge and confidence to assess unfamiliar investments and develop appropriate internal capabilities.

A combination of risk sharing, professional expertise and credible governance could therefore help address several barriers at the same time.

From public support to a self-sustaining market

Such an instrument should ultimately be seen as a market-building mechanism, rather than a permanent intervention.

It could allow pension funds to enter the market gradually, develop internal expertise and build a track record while benefiting from a degree of risk sharing.

As the market matures and institutional investors become more familiar with the asset class, the need for public support should decrease.

That distinction is important.

Connecting Europe’s capital with Europe’s future

Europe does not necessarily lack the long-term capital needed to support its startups, scaleups and transformative infrastructure. Nor does it lack investment opportunities.

What is missing is a sufficiently strong connection between the two.

Closing that gap requires more than simply encouraging institutional investors to take more risk. It requires financial structures that recognise the constraints investors face, share a defined portion of the risk, bring credible expertise into the market and allow institutional investors to build experience over time.

Well-designed risk-sharing instruments can play that catalytic role.

By helping long-term institutional capital enter venture and growth markets gradually, they can contribute to a broader, deeper and more experienced investment ecosystem — one in which public support can ultimately recede as the market becomes more mature and self-sustaining.

The goal is not to guarantee the market forever. It is to build a market that eventually no longer needs the guarantee.

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