Private equity outperforming public markets, key to EU competitiveness agenda success

The Draghi Report on European Competitiveness underlined the urgent need for the EU to close the competitiveness gap with other regions. Central to this ambition is leveraging private capital to help secure Europe’s future economic strength.

Contrary to the prevailing narrative that there is paltry private capital investment in Europe, the industry is thriving.

Over 2019-2023, private equity and venture capital invested a healthy €575.7 billion in Europe. With €1.15 trillion in assets under management, this sector is becoming a critical source of capital for European businesses.

Private equity and venture capital have become indispensable engines of Europe’s economic dynamism, with investment as a share of GDP reaching 0.44% in 2023, a significant rise from 0.30% in 2013. These investments are bridging Europe’s competitiveness gap and are essential for addressing the continent’s most pressing challenges, including the digital and climate transitions.

But why have investors increased their exposure to private capital?

Invest Europe’s Performance Benchmark report, published in June, demonstrates the high returns that investments in private equity and venture capital generate – not just for investors but for pensioners and savers, too.

Top performance

All segments of private capital over-perform compared to public markets. By investing in private equity and venture capital, long-term investors such as banks, insurance companies, pension funds, etc, get more in return. According to the report, European buyouts consistently deliver long-term net returns of 14.97%, ahead of the 6.07% return for the MSCI Europe to the end of 2023.

Furthermore, venture capital in Europe outperforms venture capital in the US in terms of ROI over a 10-year timeframe – representing net returns of 20.77% and 16.57%, respectively, to the end of 2023, says the organisation.

“The evidence is incontrovertible,” says Eric de Montgolfier, CEO of Invest Europe. “All segments of European private equity generate net returns well above public market benchmarks. Private equity is not about short-term gains; its value compounds over years and decades, making it a cornerstone for European pensions and savings.”

So why is there so much concern?

Europe still faces a significant challenge: mobilising enough capital to meet its long-term competitiveness goals. Much of the continent’s savings are directed to bank accounts and not towards tackling Europe’s big societal challenges. This leads to a significant and widening gap with other jurisdictions when it comes to the financing of innovation and new technologies.

As Draghi recently told Members of the European Parliament, “Europe is facing a world undergoing dramatic change. World trade is slowing, geopolitics is fracturing, and technological change is accelerating. It is a world where long-established business models are being challenged and where some key economic dependencies are suddenly turning into geopolitical vulnerabilities. Of all the major economies, Europe is the most exposed to these shifts.”

Fit-for-purpose competitiveness agenda

By his estimate, a fit-for-purpose competitiveness agenda would require annual funding of up to €800 billion for projects whose objectives were already agreed upon by the EU.

This money will have to come from both private and public sources. While the Draghi Report sparked headlines with its insistence that new common debt be issued specifically to fund key joint projects, historically, investment in Europe has been financed about 80% privately and 20% publicly.

According to Draghi: “If the EU carries out the strategy outlined in the report and productivity rises, capital markets will be more responsive to the flow of private savings, and it will be much easier for the public sector to finance its share. Faster productivity growth could reduce the costs for governments by one-third.”

So, despite prevailing narratives, and with its proven track record of high returns and capacity to drive investment, private equity and venture capital clearly have a big role to play in delivering Europe’s future.

Unlocking private equity

To unlock the full potential of private equity and venture capital, barriers to investment must be removed.

Regulatory and legal hurdles are currently constraining the flow of capital into private equity and venture capital, limiting the ability of pension funds and insurers to invest in these asset classes.

Putting the continent on a global footing would require the completion of the Capital Markets Union and the elimination of cross-border tax frictions. According to Invest Europe: “Removing these barriers is crucial, not just for PE and VC funds but for the businesses they support, which are key to Europe’s economic transformation.”

As Europe faces yet another protracted period of geopolitical volatility and economic uncertainty, investing in and by private equity offers a straight roadmap to driving the next wave of innovation, job creation, and global competitiveness.

[Edited By Brian Maguire | Euractiv’s Advocacy Lab ]