We've now reached an inflection point where a number of factors are coming together to remove these barriers to entry.
Firstly, venture capital is often considered a risky investment. For pension funds looking for long-term, stable investments, this allocation can be hard to justify. A growth company whose business model is unproven often looks significantly riskier than an established FTSE 100 brand.
Yet, over the past 10 years or so, technology has changed perceptions of where the risk lies, enabling highly skilled newcomers to transform sectors and challenge the incumbents. Challenger companies such as Secret Escapes, Zoopla and Swoon Editions — which Octopus has backed through its own institutional funds — have changed the way customers book travel, find new homes and purchase furniture. Secret Escapes, for example, brings luxury, discounted holidays to subscribers at the click of a button. Compare this business with a travel brand with a longer heritage, say, Thomas Cook; the risk comparison is no longer black-and-white in favor of the incumbent.
In many cases, technological developments and the quality of entrepreneurs behind these companies make the challengers look less risky than the incumbents. The investment case for tech-related startups in particular is becoming hard for pension funds to ignore.
Secondly, in the past, the scale of European venture capital funds was generally too small for pension funds to pursue. Administratively, the hassle of allocating 10% of capital to a venture capital fund, for example, was off-putting. As European venture capital funds continue to grow in scale there will be more opportunities for pension funds to allocate a meaningful sum.
Lastly, narrow allocation descriptions can limit pension funds' ability to be creative with their investments. Venture capital does not sit comfortably within set "fixed income" or "equity" allocations. Venture capital is now on the radar of investment committees that we expect to increasingly rethink and redesign their allocation boundaries to incorporate venture in future.