Unlocking the capital to fund European change
Europe needs a financing shift
Leveraging long-term assets, including citizen participation and international capital, to fund innovation and the climate and digital transition.
We must move on from a financing model that is based on large and traditional credit institutions – making full use of long-term asset classes to allocate capital to long-term projects.
We must foster participation of all European citizens to funds that finance projects valuable to the EU digital and climate transition.
We must mobilise capital from international sources and direct them to innovative EU businesses.
Today most EU savings are directed to bank accounts and not put towards tackling Europe’s well-known societal challenges. This wasted potential leads to a significant and widening gap with other jurisdictions when it comes to the financing of innovation and new technologies.
Venture capital, infrastructure and private equity have demonstrated they are among the few asset classes that can truly finance businesses at the beginning of their life (start- ups or scale-ups) or when they face new or challenging conditions.
But they cannot do this without having access to capital from a wide range of sources, both in the EU and globally. Barriers to raising funds, whether they are of a prudential or legal nature, can severely affect the flow of capital to EU businesses. This makes the removal of these barriers crucial not only to these funds but to all the businesses that they support.
Priority 1
Take down barriers that prevent pension funds and insurers from financing our digital and climate transition
Priority 2
Redirect EU citizens’ savings to productive asset classes through changes to EU passport and reporting requirements
Priority 3
Attract foreign capital to the Union
Priority 1
Priority 2
Priority 3
Priority 1
Priority 2
Priority 3
Take down barriers that prevent pension funds and insurers from financing our digital and climate transition
To finance our transition, we need long-term capital deployed into the assets that will make a difference. Institutional investors have been entrusted with such capital and have a natural interest in committing part of this capital to portfolios of long-term funds. These investments would instantly give them exposure to a wide range of growing businesses. Yet, institutional investment remains hindered by a series of misconceptions and national restrictions.
EU law for example requires banks and insurers to hold disproportionately high amounts of capital when making investments in long-term, diversified funds, making these investments comparatively more expensive. Meanwhile, many national laws still prevent pension funds from being exposed to long-term funds altogether.
US pension funds currently allocate a significant 11% of their portfolios to private equity, venture capital, and infrastructure investments. This is in stark contrast to the EU, where the 2022 allocation stands at just 4.3%. Bringing European pension fund allocation up to 10% would increase investment into the sector, and thus asset exposure into European companies, by €124 billion in current values.
For insurers, currently less than 2% is allocated to private equity, venture capital, or infrastructure investors located in the EU27. Bringing that number up to a conservative 5% would increase investment into the European economy, in current values, by €277 billion. A 7% increase would yield a €443 billion increase from current levels.
Missed opportunity: Banks’ assets represent 300% of the EU GDP
…and yet they account for less than 5% of the overall investment base of private equity.
Required changes
- Incentivise banks and insurers to allocate capital into innovative EU businesses by reassessing the capital charge they are subject to when investing in long-term, diversified funds (Solvency II for insurers and CRR for banks).
- Remove limitations to invest in long-term asset classes for pension funds (IORP Directive).
Success criteria for EU economy
By 2029, 7% of EU insurers’ and 10% of EU pensions’ assets under management should be committed to EU long-term private capital (Current situation: <2% and 4.3%).
Redirect EU citizens’ savings to productive asset classes through changes to EU passport and reporting requirements
To allow retail investors to commit capital to long-term projects, one must understand that the entire EU financial services legal architecture is inherently biased towards daily-traded products, with disclosure and distribution channels indirectly rewarding short-term investments.
As long as EU law fails to create incentives for savers to commit their capital where it can be most productive to the EU economy, such capital will risk being passive savings, or will unfortunately continue to go to volatile, speculative assets.
Everyone can play a role: Between 2019-2022 private individuals contributed €19.5 billion into private equity funds located in one of the EU27 countries.
EU-mandated investor documents like the KID (Key Information Document) should be revamped to help savers grasp the significance of their investments for the EU economy, rather than attempting to compare vastly different products. Simultaneously, efforts should persist in enhancing EU retail passports, enabling managers to develop new diversified products tailored to the liquidity requirements and risk profiles of retail clients.
Allowing experienced high-net-worth individuals from across the globe to commit capital into EU private equity, whether listed or private, would also be beneficial to start-ups, scale-ups and infrastructure projects. Currently the requirements are hindering experts and entrepreneurs from investing in private funds, despite their expertise. We need to create the conditions for our entrepreneurs to reinvest their profits into sectors they know best.
Hands tied: Currently, EU rules consider a junior banking professional as more qualified to invest in a company than a CEO with deep sector knowledge.
Required changes
- Reshape disclosure requirements in EU law to make them more fit for purpose and streamlined to specific products and incentivise investments in productive assets (KID, MiFID).
- Amend EU passports to allow managers to more easily create diversified structures appropriate to EU small savers (ELTIF, EuVECA).
- Recognise the level of experience of larger, long-term private investors (definition of a “professional investor” in MiFID II).
- Consider additional tax and legal incentives to attract wealth capital to EU long-term asset classes.
Success criteria for EU economy
By 2029, at least 10% of EU high-net-worth individuals' investable assets shall be committed to EU long-term private capital (current situation: <2%).
Attract foreign capital to the Union
The small size and fragmentation of EU capital markets has long been a disadvantage for our continent, especially as banks have retreated from their role as financiers of long-term projects. But further to this, one of our continent’s longstanding issues has been its inability to rally the capital of deeper markets for its own needs. While a large part of the EU financing is already coming from outside the continent, this masks significant disparities between markets and sectors.
Recent foreign direct investment rules have generally made it harder for EU funds and businesses to raise foreign capital. This is due to a lack of understanding of the unique, differentiating way in which private funds pool capital globally to invest in Europe. Many foreign investment regulations restrict investments in funds managed by European managers. This often stems from misconceptions about how these funds work. Specifically, there might be misunderstandings that foreign investors can directly influence the specific investments made by the fund, particularly in private equity.
Moreover, access to EU-sponsored programmes in areas such as technology and defence remains defined by eligibility criteria that include restrictive notions of (allowed) non-EU minority ownership and control.
Finally, foreign investors investing in EU businesses, directly or through funds, face a complex and fragmented foreign direct investment screening system. This is one of the stones that must be turned for Europe to make the most of capital that is ready to be deployed into its companies.
All of these issues cut Europe off from a much- needed stream of capital and can be addressed by EU lawmakers during the next mandate.
Significant importer: Almost 50% of capital injected by European private equity funds in EU businesses in 2023 was raised outside Europe.
Required changes
- Redefine foreign investment rules to acknowledge characteristics of private equity fund structures – and ensure passive structures are not unduly covered by these rules.
- Create a Centralised Screening System for FDI to mitigate the inefficiencies and costs stemming from divergences in scope, requirements, timelines, and effects.
- Consider setting a One Stop Shop Mechanism for multi-country transactions, so investors only need to file a single application.
Success criteria for EU economy
By 2029, Europe must safeguard at least current levels of foreign investment by streamlining complex investment screening processes.
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Explore our 12 priorities
Priority 1: Take down barriers that prevent pension funds and insurers from financing our digital and climate transition
Priority 2: Redirect EU citizens’ savings to productive asset classes through changes to EU passport and reporting requirements
Priority 3: Attract foreign capital to the Union
Priority 4: Complete the Capital Markets Union
Priority 5: Leverage existing funding initiatives and create an EU Champions Fund
Priority 6: Secure tax policies that are simple to adhere to, promote growth and incentivise cross-border fundraising & investments
Priority 7: Develop a programme of EU regulations to promote talent mobility and the digitalisation of Europe
Priority 8: Reshape EU company law to incentivise equity investments
Priority 9: Develop a flexible, opt-in EU insolvency law on top of the existing EU-wide rules
Priority 10: Ensure there is a straightforward, seamless, and compatible EU sustainability disclosure framework
Priority 11: Attract private capital finance to the EU’s most critical sectors, from infrastructure (digital, climate, transport, energy) to defence
Priority 12: Improve the cross-border EU investment environment
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