Europe does not lack capital. It struggles to direct enough of it towards the companies and infrastructure that will determine its future competitiveness. European asset managers oversee around €34trn, while occupational pension funds hold approximately €2.7trn. At the same time, the Draghi report estimates Europe’s additional investment needs at roughly €800bn per year.

“The challenge is one of allocation, not accumulation,” say Kenny Panjanaden, partner and Luxembourg lead global AWM Market Research Centre at PwC, and Emanuela Sardi, partner and Alternatives Clients & Markets co-leader at PwC Luxembourg.

Public funding alone cannot bridge a gap of that scale. Institutional investors — pension funds, insurers, sovereign wealth funds, endowments and foundations — will therefore have to play a central role if Europe wants to finance innovation, strengthen its competitiveness and reduce its dependence on external capital.

Getting capital moving

The question is how to create the conditions for that capital to move. This means developing the right regulatory frameworks, investment vehicles and distribution channels to direct capital more efficiently towards productive assets. The EU’s Savings and Investments Union (SIU) is part of that effort, initially seeking to channel more household savings towards capital markets while creating deeper and more integrated European markets.

Venture capital and private equity play complementary roles in that ecosystem. Venture capital finances innovation at its earliest and riskiest stages, while private equity supports companies as they scale, professionalise and expand internationally. The Eltif, meanwhile, plays a different role. It provides a regulatory passport designed to give a broader range of investors access to long-term assets such as private equity, infrastructure and private credit.

Eltifs as a bridge

Eltif 2.0 could therefore become one of the links between Europe’s savings and its innovative companies. The original regime was constrained by features including the €10,000 minimum investment and a rigid closed-ended structure. The 2023 reform introduced greater flexibility.

The market response has been significant. According to the figures cited by PwC, Luxembourg domiciles 124 of the EU’s 211 Eltifs. Panjanaden and Sardi believe Eltif 2.0 has the potential to become an important part of the bridge between Europe’s long-term savings and innovative companies, although the market is still at an early stage.

Solvency II is not the only barrier

Prudential regulation is frequently presented as one of the main reasons insurers do not invest more heavily in private markets and venture capital. PwC argues that the reality is more complex. Insurers are long-term, liability-driven investors. Their decisions also depend on liability matching, liquidity needs, governance requirements, portfolio diversification, expected risk-adjusted returns and overall risk appetite.

Changing Solvency II would therefore not automatically trigger a major reallocation towards venture capital. The 2024 reform simplifies, among other things, the qualification criteria for long-term equity investments, allowing eligible investments to benefit from more favourable prudential capital treatment. But venture capital remains a higher-risk and illiquid asset class.

Any increase in insurers’ exposure is therefore likely to be gradual and driven as much by product innovation, market maturity and risk appetite as by regulation itself.

Luxembourg at the centre of the chain

Luxembourg already occupies a central position in the infrastructure through which institutional capital reaches private markets. Once an insurer or pension fund decides how much of its portfolio can be allocated to illiquid assets, it may invest directly in a venture capital fund or through funds-of-funds. Fund managers then deploy that capital into companies over a relatively long investment horizon.

SCSp, RAIFs, SIFs and Eltifs are increasingly used to structure, pool and passport these commitments. But the process is neither quick nor frictionless. Each link adds governance and risk controls, but potentially also fees and delays.

Money committed by an insurer today may only reach a startup’s balance sheet one or two years later, according to PwC — a lag policymakers can sometimes underestimate.

From domiciliation to decision-making

For Luxembourg, the next challenge may lie beyond fund structuring. The country already offers what Panjanaden and Sardi describe as one of Europe’s strongest structuring toolboxes, built around vehicles including the SCSp, RAIF and Eltif, combined with extensive cross-border distribution expertise.

What Luxembourg still lacks is more of the investment decision-making itself.

Many funds are domiciled in Luxembourg, while the general partners, investment committees and portfolio managers deciding where capital is deployed remain concentrated in other financial centres, particularly London and Paris.

Becoming a genuine capital allocation hub would therefore require Luxembourg to continue attracting more front-office talent, including portfolio managers and venture professionals. The opportunity is to evolve from a financial centre that facilitates the flow of capital towards one that increasingly influences where that capital is invested.

Infrastructure, energy and AI

Beyond venture capital, PwC sees some of the greatest opportunities for institutional investors in the infrastructure required for Europe’s long-term transformation. Electricity grids, data centres, digital connectivity and renewable energy all require substantial amounts of capital. At the same time, these assets can provide the long-duration, inflation-linked cash flows sought by many insurers and pension funds.

Artificial intelligence represents another major investment theme. But institutional investors may be better positioned to finance its enablers — computing infrastructure, power generation and semiconductor supply chains — rather than attempting to identify individual technology winners.

Defence represents newer territory. Financing needs are substantial, but investors must still navigate sustainability frameworks, even as the European Commission has stated that the EU sustainable finance framework is compatible with investment in the defence sector.

Where could €100bn come from?

If Europe wanted to mobilise an additional €100bn for innovation over the next decade, PwC sees four potential sources working together. Given the size of European insurers’ investment portfolios, even a half-percentage-point reallocation could mobilise tens of billions of euros towards private markets.

For pension funds, wider use of automatic enrolment in supplementary pension schemes could create larger pools of long-term capital. Retail investors could contribute through Eltifs and other well-designed pan-European products. Public institutions, including the European Investment Bank and European Investment Fund, could meanwhile help de-risk the first institutional euro.

Panjanaden and Sardi go one step further, suggesting a pan-European pension system based on automatic enrolment with the ability to opt out. The resulting long-term capital could be invested in assets critical to Europe’s competitiveness, from defence and the energy transition to infrastructure and digital sovereignty.

Because Europe’s problem ultimately extends beyond venture capital. Successful early-stage companies also need growth equity, private credit, deep public equity markets and credible IPO exits as they expand. Without that complete financing ecosystem, promising European companies risk continuing to turn to US capital when they reach their next stage of growth.