Venture capital: pension plans dominate early-stage investing in North America

With Preqin’s latest Investor Survey identifying early stage as a promising opportunity in 2023, we explore who is behind this type of investment in North America

At the end of 2022, investors from around the world who participated in the Preqin Investor Survey named early-stage investing as the venture capital strategy that presents the best opportunities over the next 12 months. Nearly half of the respondents selected this strategy (48%), far outpacing the second most popular option of seed investing, which received 31% of the votes (Fig. 1). So who is participating in early-stage investing in North America?

Simply put, the answer is pension plans. According to Preqin data, private and public pension funds combined occupy 26% of firm types investing in early-stage funds in North America, closely followed by foundations, which account for 23% of investors. As a result, it comes as little surprise that the bulk of these firms are in areas with the most pension funds. 

California and New York are home to the highest number of pension funds that invest in early-stage funds. California, as well as being home to Silicon Valley and its VC industry, is also the most populated state in the US, with over 40 million inhabitants. Such a high population translates to many pension funds, with more than 80 public pension funds registered in the state alone, according to Preqin data. That number nearly triples when including the 152 private pension funds based in the state. 

New York, while only the fourth most populous state in the US, holds the crown for the most pension funds – both public and private − in the region, at 243. Out of the 560 pension funds currently investing in early-stage funds in North America, 54 of them are based in New York, while 53 are based in California (Fig. 2). These two states account for roughly 20% of all pension funds in North America investing in early-stage funds, a notable amount considering they represent less than 10% of the total pension plans in the region.

Of the US pension funds that allocate to early-stage funds, 75% allocate less than $1bn to private equity overall. After the $1bn mark, allocations drop significantly to 12% between $1bn and $2bn, and over this all allocations decline to single-digit percentages (Fig. 3). 

Pension funds, both private and public, are active investors in VC early-stage investing. These investors are concentrated in areas with more pension plans, and they operate with small asset allocations. As nearly half of investors responding to the survey selected early-stage as having the potential to offer the best opportunities in VC, pension plans seem well positioned to capitalize on early-stage opportunities that may arise in 2023.