Grassroots ‘funds of funds’ should be prime target for pension mega pots

As UK pension reforms promise to channel more funding towards VC, there is a significant opportunity to earmark some of this for grassroots ‘funds of funds’, supporting entrepreneurial and emerging managers powering the early-stage innovation pipeline. 

The 2025 UK pension shake-up could spark an exciting new period for VC funding across Europe. Under the proposed rules, new pension mega funds will have greater freedom to invest in the most innovative tech startups, providing a welcome boost to the venture ecosystem. The big question is whether these funds will reach those fledgling businesses with the greatest growth and innovation potential.

Larger VCs and more established startups have always attracted the lion’s share of venture funding - and headlines. But the real magic happens at the seed stage, where the most innovative ideas are nurtured and turned into something that could ‘change the world,’ while generating the most life-changing returns. I previously wrote about the vital role of entrepreneurial and emerging VCs in identifying and nurturing these businesses, particularly in the current climate.  

The danger is that most of these specialist, hands-on VCs could fly under the radar of the new mega-LPs. This has often been the case with government backers such as the European Investment Fund and British Business Bank, which invariably focus on the larger end of the market, causing the big funds to keep getting bigger. 

By, instead, targeting funds of funds investing in entrepreneurial managers, these mega funds have an opportunity to benefit early-stage founders and those looking to maximise their pensions.

Pension mega funds could miss out on a vital section of the market 

For pension funds and other institutional LPs, there are practical reasons why entrepreneurial and emerging VCs tend to be overlooked. Firstly, larger players are seen as less risky, with businesses having a longer track record, proven product-market fit, and team. But also, at a more practical level, it is technically too difficult for larger funds to support early-stage businesses via smaller VCs, because the ticket sizes are usually too small. Huge fund managers don’t have the time to deploy $1m tickets into 50 small funds, their preference is to deploy one $50m ticket into a large fund. The work involved in meeting and assessing the target funds is just too great. 

Furthermore, most large LPs lack the knowledge, experience, and networks to identify, access, and assess emerging managers effectively. It takes years to develop an understanding of the emerging manager ecosystem, what to look for in a team, approach, and strategy; vital to increase the chance of picking winners. 

The role of funds of funds

We talk about a ‘startup ecosystem’ but the venture funding landscape is very fragmented, comprising a multitude of networks spanning different industries, technologies, regions, and knowledge domains. Accessing early-stage startups requires the right connections and expertise, whether in deep tech, medicine, quantum computing, or any number of other niche areas. Backing very early-stage businesses requires very early introductions, which are only possible with the right network. This is the strength of entrepreneurial and emerging managers, which specialise in areas where they have deep knowledge and connections. 

Funds of funds, run by larger VCs, with broader networks, provide a critical layer on top of these managers, channeling a wider range of funds into their portfolios and expertise. For example, at Concentric, our fund of funds is based on a framework of geographies and themes to which we would like exposure. We also look for managers who provide access to certain networks and pools of talent. For example, we’ve backed a fund incubated by a unicorn founder, who we’re confident will have access to good deals in the future. 

Picking an emerging VC fund is different to picking a startup where, despite a high level of uncertainty, there is at least a product, market, and direction of travel. With a fund, there is a strategy, but it is hard to predict how the team will respond to market change and opportunities that arise. Consequently, there is a much greater reliance on the network and team. 

Funds of funds: the ideal solution for pension mega funds

Larger VCs and scale-ups are, of course, a vitally important target for pension funding but the new mega funds should think more broadly and also set aside a portion of their pots for funds of funds and the vital role they play in reaching the most entrepreneurial managers, and most cutting-edge ideas. In doing so, they won’t just support future innovation but also gain access to new networks, diversify their portfolios, and have access to potentially greater returns, without the practical difficulties of deploying numerous smaller tickets directly. 

By spreading funds throughout the ecosystem, this approach also brings greater economic benefits in terms of more companies and more employment over the long term.