Balancing investment growth and investor protection to support long-term innovation

Introduction

The European Union faces a structural challenge in aligning capital flows with its strategic priorities. The sustainable transition, digital transformation and efforts to catch up on artificial intelligence – to name a few – require vast investments. Yet, the financial system shows inherent limitations in helping address these challenges. Matching financial flows with public needs is not only a matter of sectoral allocation. It also requires solutions to lengthen investment horizons and tools to expand companies’ financing.

The revision of the European Long-Term Investment Fund (ELTIF) regime in 2024^[1] illustrates actions already undertaken. By expanding access to retail investors and easing eligibility rules, the new regime has garnered interest from asset managers and investors, with 226 funds registered as of April 2026, against 57 launched between 2015 and 2021^[2].

In January 2026, the European Commission launched a call for evidence to improve the ability of venture and growth capital funds to support innovation and competitiveness, with an expected revision of the European Venture Capital Regulation (EuVECA) in 2026^[3]. Adopted in 2013, the EuVECA introduced a lighter regulatory regime for investments in early-stage European companies to promote their financing. While the EuVECA reached a larger market size (1,229 funds since 2013) than the ELTIF, revamping it could unlock more investments in innovation to drive the green and digital transitions.

Yet, adapting financing tools alone will not be enough. Structural barriers such as market fragmentation and limited cross-border investment continue to restrict access to capital for companies in the EU, in particular startups and scaleups. At the same time, maintaining investor protection is essential. Trust in financial markets underpins investment, and weakening safeguards could have adverse effects. This paper explores potential improvements to the EuVECA, aiming to enhance its effectiveness while preserving necessary protections and avoiding unintended consequences.

I. A closer look at the EuVECA market

A. The EU venture capital market lags significantly behind the US

According to estimates from the Banque de France, the venture capital market has grown in Europe in recent years, but remains far from the US model (see Figure 1), which reduces growth opportunities for innovative products and services. Multiple reasons can explain this gap. Among others, some argue that the growth of the venture capital market is partly constrained by barriers stemming from the EuVECA. The regulation would limit the development of funds beyond EUR 500 million of assets under management (AuM), as asset managers would fall under the stricter requirements of the Alternative Investment Fund Manager Directive (AIFMD)^[4] in the case of larger funds.

B. No clear signs of a cliff effect limiting the growth of EuVECA funds

When examining the distribution of funds registered under the EuVECA and European Social Entrepreneurship Fund (EuSEF)^[5] regimes (see Figures 2 and 3), it appears that 13.6% of EuVECA funds and 7.7% of EuSEF funds are also registered as Alternative Investment Funds (AIFs)^[6]. It seems reasonable to assume that EuVECA funds register as AIFs when fund managers exceed the applicable EUR 500 million threshold.

In comparison, European Securities and Markets Authority 2023 market data^[7] show that less than 5% of AIFs exceed EUR 500 million in assets under management (see Figure 4). The share of EuVECA funds registered as AIFs (13.6%), for which it is reasonable to assume that asset managers have reached EUR 500 million of AuM, is therefore higher than the percentage of AIFs above EUR 500 million in AuM. This suggests that there is no noticeable cliff effect pushing asset managers to switch from the EuVECA regime to the AIFMD regime, and that it would hamper their growth. However, this analysis has limitations due to data availability constraints, and a more robust assessment would require a breakdown by AIF type (e.g. private equity, real estate, hedge funds) and a comparison of AuM at fund and asset manager level. 

C. The EuVECA regime differs significantly from the ELTIF Regime.

While it may be tempting to replicate adjustments introduced in the revision of the ELTIF framework, important differences suggest that a differentiated approach is preferable. First, a total of 1,229 EuVECA funds have been registered across the EU since 2013. This indicates that the regime has already achieved more traction than the ELTIF I framework. Second, whereas the majority of ELTIF funds are domiciled in Luxembourg, EuVECA funds display a more diverse geographical distribution across Member States. At the same time, market data (see Figures 5 and 6) show that some countries, such as the Netherlands, report a higher proportion of EuVECA funds registered as AIFs. This suggests that the limited development of EuVECA funds in certain jurisdictions is partly driven by national policies and initiatives that shape the broader venture capital ecosystem.

II. The need for a holistic answer to foster innovation

The larger size of the EuVECA fund market, together with the uneven growth of EuVECA funds across Member States, suggests that the development of the venture capital ecosystem is unlikely to come from a revamp of the EuVECA framework alone. Banque de France^[8] has pointed to several factors beyond the EuVECA regime that may explain the limited development of the venture capital market:

• Low participation by actors with long-term investment horizons (e.g. pension funds)
• The persistent fragmentation of EU capital markets, hindering the emergence of large funds able to reach sufficient diversification to invest in venture firms
• Difficulties for managers in exiting investments, for instance through initial public offerings, which also reduce companies’ scale-up opportunities in the EU
• The need to support the transition from scientific research to entrepreneurship

Fundamentally, Finance Watch highlights that increasing the number and size of venture capital funds without setting incentives and framework conditions for companies to develop investable projects could increase the risks of EuVECA funds. Asset managers could allocate capital to lower-quality or speculative projects due to a lack of viable opportunities, ultimately leading to reduced returns and/or excessive risk-taking. Barriers to financing and to the development of innovation in Europe are deeply interconnected and should be addressed through a coherent and well-aligned policy approach, above all through long-overdue capital market integration^[9]. In this context, the proposed “28th regime” initiative could contribute to reducing market fragmentation and improving access to financing across Member States, in particular for innovative companies and startups^[10]. However, Finance Watch acknowledges that pursuing this initiative further would require resolving many essential issues, notably around labour rights^[11].

III. Fostering the supply of funding: three ways for growth

Taking into account the need for complementary actions to support demand for venture capital funding, this section explores possible adaptations to the EuVECA to reinforce the interest from asset managers and investors in the regime. Finance Watch sees three axes of extension of the EuVECA scope: extending the number of eligible asset managers, broadening the pool of potential investors, and expanding the types of investments allowed under the EuVECA.

A. Extending the number of asset managers eligible under the EuVECA

As previously noted, the EuVECA is restricted to asset managers with less than EUR 500 million in AuM. Beyond this threshold, managers become subject to more stringent AIFMD requirements, including enhanced transparency, depositary obligations, and risk management provisions. Some stakeholders view this as a disincentive for asset managers to scale up as it would increase regulatory rules to comply with. Although market data does not clearly confirm the existence of a significant cliff effect, several options could be considered to reduce the operational burden associated with a switch to the AIFMD.

Increase of the EUR 500 million threshold

Raising the application thresholds alone would not eliminate the cliff effect. Simply increasing the AIFMD threshold does not remove the challenge for asset managers transitioning from the lighter EuVECA regime to the more stringent AIFMD requirements. Significantly raising the threshold (e.g. to EUR 1.5 billion, as suggested by some industry associations) would therefore be unlikely to meaningfully reduce barriers to growth.

Yet, Finance Watch acknowledges that the EuVECA regime was introduced in 2013, and the application threshold does not consider inflation. With cumulative inflation in the EU estimated at around 35.1% between April 2013 and December 2025^[12], an equivalent threshold should average EUR 675 million. In this context, setting the threshold at EUR 700 million appears to be a balanced and proportionate adjustment. 

Finally, Finance Watch warns against viewing the AIFMD regime as an obstacle to market growth. This view tends to overstate its “burden” and overlooks the AIFMD’s success since its introduction in 2011, notably in providing a passporting regime that facilitates cross-border fund distribution within the EU.

Introduction of a progressive application of the AIFMD

A progressive application of the AIFMD could help reduce growth barriers for asset managers. Transitioning from the lighter EuVECA regime to the stricter AIFMD regime can be operationally challenging. Yet, investor protection in alternative investments remains essential to maintain investors’ trust and preserve financial stability. A gradual implementation approach could ease this transition and ensure that necessary safeguards are not removed for most asset managers.

A distinction between fund-level and manager-level rules could be part of such a phased implementation. Separating the risks tied to asset managers from the risks tied to EuVECA funds could justify fund-level exemptions when an asset manager exceeds the EUR 500 million AuM threshold, but manages smaller-sized funds. This could limit administrative work for managers with smaller funds but higher aggregate AuM, for example, due to an overlap in timing between the launch of new funds and the liquidation of existing ones. The details of such exemption would need to be further specified. 

Adaptation to the threshold calculation methodology

The current calculation methodology can bring an EuVECA asset manager in scope of the AIFMD when the threshold is met for a short period only. The scope of application of the EuVECA, defined in Article 2(1) of the EuVECA Regulation, leverages the threshold defined in point (b) of Article 3(2) of the AIFMD. The Commission Delegated Regulation (EU) No 231/2013 complements the AIFMD and states that (1) the calculation of AuM is based on the aggregation of the value of all assets managed across AIFs (Article 2) and (2) a threshold breach should not exceed a period of three months to be considered occasional (Article 4). However, Finance Watch notes that fund management workload is higher at the inception of a fund and lower once investments are made. The current threshold may delay the launch of new funds if managers seek to remain below the AIFMD threshold, or encourage premature exits, potentially undermining longer-term exit strategies. Allowing a threshold breach over a 12-month period to be considered temporary could accelerate the launch of new funds.

B. Broadening the pool of potential investors

Extending access to EuVECA funds can facilitate their distribution and support fundraising by fund managers. This could, in turn, boost the number of EuVECA funds by broadening the pool of potential investors, and increase their size. However, investor protection, liquidity constraints, and softer rules for other asset types must be considered. Finance Watch also sees a role for public investment to foster the financing of venture capital, as highlighted in a previous report, which is not covered in this position paper.

Opening EuVECA funds to retail investors

Opening EuVECA funds to retail investors can seem attractive, as it could redirect a portion of capital from retail investors with a higher risk appetite to investments with higher potential to contribute to innovation and EU strategic priorities. However, as EuVECA funds are by nature more risky than ELTIFs, this approach raises concerns about the protection of retail investors and increases the risk of mis-selling. 

Expanding EuVECA access implies new distribution channels such as retail bank networks, where most intermediaries lack expertise in private equity and its associated risks. Distributing new, risky and complex products would require adaptations to the retail investor journey, and an experience in private equity that cannot be achieved by most retail bankers due to the nature of their client segment. Ultimately, this would increase the risk of inadequate recommendations on niche financial instruments, in a context where most banks tend to streamline and standardise their product offering. Finance Watch therefore considers that retail exposure to venture capital would be better achieved indirectly, through institutional investors, who are better equipped to assess and manage the risks.

Softening limits for institutional investors to invest in EuVECA funds

Relaxing the limits for UCITS funds to invest in EuVECA risks relaxing the limits on other asset classes. Expanding UCITS access to venture capital could help channel retail capital into the real economy, while ensuring investments are managed by experienced institutional investors. Currently, UCITS funds may invest up to 10% of their portfolio in non-eligible assets through the “trash bucket” under Article 50(2) of the UCITS Directive^[13]. Expanding this bucket could increase allocations to venture capital. However, it is unrealistic to expect liquid UCITS funds to meaningfully increase exposure to inherently illiquid assets such as EuVECA funds. Moreover, broadening the trash bucket could also allow greater investment in other illiquid instruments, potentially raising financial stability concerns. 

Therefore, pension funds and insurers, given their longer investment horizon, are better positioned to absorb the illiquidity and higher risk associated with venture capital in exchange for higher potential returns.

C. Expanding investments eligible under the EuVECA

Finally, expanding the range of eligible investments, set through the definitions of “qualifying portfolio undertaking” and “qualifying investment” in points (d) and (e) of Article 3 of the EuVECA Regulation, could further enhance interest in the EuVECA. However, this approach should not jeopardise the original purpose of the framework, which currently limits the types of instruments to ensure a clear focus on venture capital. To this end, the European Commission could leverage the European Parliament’s report on the 28th regime, which suggests introducing a harmonised equity-like debt instrument, enabling investors to support companies without acquiring control rights. Aligning the scope of eligible EuVECA investments with such an instrument could help support the uptake of the 28th regime^[14].

Vincent Vandeloise, Senior Research & Advocacy Officer at Finance Watch

[email protected],

+32 2 880 04 37