European limited partners (LPs) are no longer passive check-writers. A growing number of pension funds, insurance companies, and family offices are negotiating follow-on investment rights with venture capital firms, allowing them to co-invest directly in portfolio companies that show exceptional promise.

According to a report by Tech Funding News, this trend, long standard in the US, is gaining momentum in Europe. LPs such as Germany’s Bpifrance and UK-based Pension Insurance Corporation have begun embedding co-investment clauses in their fund commitments. The goal: to capture more upside from breakout startups without being diluted in later rounds.

The US Model Crosses the Atlantic

In the United States, LP co-investment is routine. For example, the California Public Employees’ Retirement System (CalPERS) has co-invested alongside firms like Sequoia Capital for years. European LPs, traditionally more conservative, are now adopting similar strategies as the region’s startup ecosystem matures.

“We want to back the best companies multiple times, and co-investment rights give us that flexibility,” said Anna Valero, head of private equity at a large European pension fund, in an interview with Tech Funding News. “It’s a win-win: we get direct exposure, and the VC firm strengthens its relationship with us.”

Implications for Startups and VCs

For startups, this shift means potential access to deeper pockets from institutional investors who already have a relationship with the fund. However, it may also introduce complexities. LPs could exert pressure on VCs to prioritize certain companies, creating conflicts of interest. Additionally, startups may face additional due diligence and governance requirements from institutional co-investors.

“The rise of LP co-investment can lead to a two-tier system,” warns Dr. Markus Richter, a venture capital researcher at the University of St. Gallen. “Startups with LP backing might get preferential treatment, while others struggle to attract follow-on capital.”

Data Points and Examples

The article cites Lightrock, a European growth equity firm, as an example. Lightrock has granted co-investment rights to LPs like the Dutch pension fund PME, enabling them to invest directly in portfolio companies such as Sunfire, a clean hydrogen startup. Such arrangements are becoming more common: data from PitchBook shows that LP co-investment in European venture deals increased by 34% in 2024 compared to 2020.

This trend is not without risks. LPs may lack the operational expertise to support startups beyond capital. However, the potential returns from backing unicorns early are too tempting to ignore.

Looking back, the current shift mirrors the evolution of the US venture industry in the 1990s, when LPs like university endowments began demanding co-investment rights. That change helped fuel the dot-com boom and subsequent innovation hubs. Similarly, in Europe, the growing prevalence of follow-on rights could accelerate the growth of the region’s tech ecosystem, but it requires careful governance to avoid misaligned incentives.

As European LPs become more assertive, the relationship between fund managers and their investors will evolve. The next wave of European unicorns may well be shaped not only by the vision of their founders but also by the strategic appetite of the LPs backing them.