Pension funds come round to VC managers’ thinking on fees and fund-of-funds
Discussions around performance fees "have moved forward significantly over the last 12 months" and are "much more acceptable" to large pension funds, according to Stephen Budge of LCP (Chris Ratcliffe/Bloomberg)
Fund-of-fund structures are opening up access for UK master trusts to smaller venture capital commitments as investors grow more willing to discuss fees, consultants say. Greater uptake by schemes could improve lukewarm fundraising sentiment among VC managers.
Stephen Budge, a partner at LCP who advises a range of large UK defined contribution schemes, says discussions around performance fees "have moved forward significantly over the last 12 months" and are "much more acceptable in terms of their use".
While funds are still "pushing down on quite the [fee] quantum", the UK master trust market has moved during the past year to a "significant proportion" having a default fund "which has some element of performance fee in it", Budge affirms.
This assessment is echoed by Robyn Klingler-Vidra, vice-dean at King's College London and a reader in political economy and entrepreneurship, who tells MandateWire Analysis that fund managers are finding a variety of fee structures outside of the two-and-20 fee model.
The two-and-20 fee structure is fairly common in venture capital and private equity, typically comprising a 2 per cent annual management fee and a 20 per cent performance fee.
Klingler-Vidra says greater fee innovation is making "the economics work for the fund manager and also fit with the restrictions or requirements that the pension funds are facing".
DC schemes are still subject to a 0.75 per cent default fund charge cap, which means schemes often need to prioritise how much they spend on pricier private market funds.
This includes "finding a way to account for [fund expenses] in side letters or rebates to bring down the management fees", alongside a greater use of separate administrative expenses and transaction fees, Klingler-Vidra notes.
Fundraising struggles continue
Despite these positive developments, fundraising conditions remain challenging.
In its UK Venture Capital Financial Returns 2025 report, the British Business Bank found a solid performance of UK venture capital funds in recent years, with fund vintages between 2020 and 2023 even marginally outperforming their US counterparts on some metrics.
While the UK venture capital market is still Europe's third largest, the bank found a "disproportionately low amount" of investment from pension funds into UK ventures.
For now, UK venture capital managers' sentiment remains subdued. Most professionals (69 per cent) in the bank's December survey said the fundraising environment was either poor or very poor, with only two of the 50 polled reporting a strong environment.
The report adds that general partners are "pessimistic about the current fundraising environment amidst ongoing macroeconomic and geopolitical uncertainty".
"GPs expressed a similar level of pessimism towards fundraising conditions and cited higher interest rates and subdued distributions to investors as hampering the attractiveness of the asset class for institutional LPs," the survey notes.
However, Klingler-Vidra says that in many respects the British venture capital industry is thriving, with managers "kicking the tires on the tech and challenging business models", allowing startups to learn even when managers do not invest.
But the academic is sceptical about the UK government's Mansion House Accord, an agreement between 17 of the largest pension providers to increase investment in British unlisted assets to 10 per cent of default funds by 2030. The agreement was inked in May last year.
"The problem with the Mansion House [Accord] in my view is that you're sort of forcing the allocation," she says.
Klingler-Vidra says the motivation behind the Mansion House Accord and similar initiatives is the assumption that encouraging large pension schemes to invest across the venture lifecycle will address structural issues in the market.
"For me, that's missing the point," she says.
She adds that, in the US, the model worked primarily because pension funds were able to access top-performing venture capital companies such as Kleiner Perkins, Sequoia and Accel, which delivered strong returns.
"The only real reason that it worked is that those allocations... produced phenomenal returns," she says, enabling funds to fulfil their fiduciary duties.
Asset owners trying to invest directly into venture capital funds often find their “ticket size just isn't big enough”
Fund-of-funds a useful gateway into ventures
While some investors have traditionally been wary over fund-of-fund structures given fee considerations, the funds are proving useful as schemes get comfortable with VC.
Those asset owners trying to invest directly into venture capital funds often find their "ticket size just isn't big enough", says Budge.
On top of this, venture capital funds are typically closed-end vehicles, making pension funds more likely to favour structures that suit their liquidity needs.
Where ticket sizes are small, schemes may reasonably think it makes "no difference in terms of return for members" whether or not an investment is made. That means the onus is on managers to make venture investments easier to access at a larger scale.
Fund-of-funds also allow pension schemes to lean more on managers' competencies. Most pension schemes are inhibited in venture capital due to a lack of internal subject expertise.
"You don't have teams of individuals within pension funds across the UK who have the time and the skillset to understand venture capital funds and to select managers and to work with managers well," Klingler-Vidra says.