The Potential of Private Capital in Europe

McKinsey & Company has published a report analyzing the current state and strategic role of private capital—specifically private equity (PE) and venture capital (VC)—as a key enabler for enhancing Europe’s competitiveness and narrowing the productivity and innovation gap with the United States. According to the report, private capital is one of the few sectors capable of deploying transformational capital at speed and scale. It offers a high-impact channel to allocate investment toward strategically important sectors, scale businesses, and support sustainable economic growth. Private capital in Europe remains underdeveloped compared to the U.S., with PE and VC assets under management (AUM) representing just 8% of European GDP, compared to 17% in the U.S. This growth potential becomes even more relevant in the context of the Draghi report on “The future of European competitiveness”, which estimates that the European Union will require an additional €800 billion in annual investment by 2030.

• Current Landscape of Private Capital in Europe: PE and VC
  
  European private equity (PE) and venture capital (VC) investors manage approximately €1.5 trillion in assets under management (AUM), excluding credit and infrastructure. Over the past three years, average annual investments have reached €130 billion, spanning all sectors. However, some areas have shown particularly strong growth—energy with a ~14% compound annual growth rate (CAGR), and digital technologies, biotech, and healthcare with ~10% CAGR.
  
  
• Comparison with the United States: Scale and Performance Gap
  
  - Scale: Despite recent growth, the European private capital market remains significantly smaller than its U.S. counterpart. PE and VC assets represent about 8% of Europe’s GDP, compared to 17% in the U.S. Additionally, Europe’s annual deal volumes and investment levels are roughly half of those seen in the U.S. market.
  
  - Performance: Over the past 20 years, U.S. private capital funds have outperformed European ones by approximately five percentage points in average annual returns. 57% of the top-performing PE funds are headquartered in the U.S., investing 2.8 times more capital and completing 1.8 times more deals per fund than their European peers. The disparity is even greater in VC: 90% of the top-performing VC firms are based in the U.S., having invested 16 times more capital and executed 10 times more deals per firm than European firms.
  
  
• Where to Deploy Private Capital: Investment Areas and Recommendations
  
  The McKinsey report outlines four main areas of opportunity for private capital investment in Europe, along with a set of enabling policy recommendations:
  
  - Key Investment Areas: 1) Strategically important sectors:Energy, artificial intelligence (AI), defense, aerospace, quantum computing, pharmaceuticals, automotive and transportation, clean tech, as well as start-ups and scale-ups driving innovation.2) Scaling high-growth companies into pan-European champions: Private capital is positioned as a critical enabler in driving complex and large-scale mergers and integrations, and in developing the next generation of pan-European leaders by accelerating both in-country and cross-border consolidation in critical sectors.
  
  According to McKinsey, Europe’s market fragmentation represents a significant value creation opportunity compared to the more consolidated U.S. market. 3) Unlocking new funding sources: Mobilizing pension funds and insurance companies by enabling them to increase their allocations to private capital through policy and regulatory reform.4) Closing productivity gaps: Supporting workforce upskilling and structural efficiency policies to help Europe address its productivity challenges.
  
  - Recommendations: To fully unleash the potential of private capital in Europe, the report suggests among others the following measures: Promote public–private co-investment mechanisms, especially via the European Investment Bank (EIB), simplify and harmonize regulation and tax frameworks across Member States for innovative companies, provide incentives for business angels, ease and encourage IPO processes for growing firms, reduce cross-border investment barriers within the EU (a key enabler will be the advancement of the Capital Markets Union, currently evolving under the Union of Savings and Investments framework).