Bridging gaps between pension funds and local impact investments.

Mental challenges for pension funds.

July 9 2024

Pension funds are increasingly interested in investments that not only yield returns but also contribute positively to society. In the Netherlands, an ecosystem of impact investors is emerging. However, there are significant challenges, including several gaps between pension funds on one side and impact startups and investors on the other. In this blog, I’ll delve into six of these gaps.

On May 29, SPO Nyenrode organized the conference ‘Future-Oriented Investing: Building Synergy Between Startups/Scale-ups and Pension Funds’. Moderated by investigative journalist Jeroen Smit, we discussed the positive impact pension funds can make through investments in startups. I previously covered why, how, and with whom this contribution is possible in my earlier blogs.

Six challenges

There’s much to be optimistic about, as the Netherlands witnesses the growth of an impact investor ecosystem. Pension funds are also showing increased interest in impact private assets. However, substantial challenges remain. During my own presentation at the conference, I highlighted several gaps between pension funds and impact startups and investors. Participants emphasized the importance of mental flexibility to bridge these gaps—sometimes making concessions on certain requirements when other benefits can be delivered. Let’s explore these challenges further.

Challenge #1: Scale

Firstly, there’s a size disparity. Impact startups typically require relatively small amounts (in the hundreds of thousands or low millions). Impact funds are also not massive (ranging from tens to hundreds of millions). However, pension funds often seek minimum investments of €50 million, constituting only 10% of their fund or deal—meaning a minimum of €500 million is required.

This situation is unfortunate because it means missing out on crucial deals that strengthen the ecosystem (remember, that’s also impact!). Moreover, the added value of a pension fund lies in its long-term perspective and ability to finance growth needs. It also allows them to participate in deals that may become inaccessible later. Ideally, pension funds should be mentally flexible enough to engage in smaller deals, as we already see happening.

Challenge #2: Costs

Secondly, there’s a cost gap, inversely related to scale. Pension funds think in terms of basis points (<0.1%) when considering costs, while impact funds, due to their smaller scale and higher labor intensity, often incur costs in the multiple percentage range. Unfortunately, they are sometimes unfairly lumped together with private equity firms that charge high fees for entirely different reasons. Overcoming this challenge requires mental agility—to recognize what value offsets these costs. For instance, consider solving information problems, reducing risk, achieving greater impact, and gaining access to early-stage deals.

Challenge #3: Information

Thirdly, an information gap exists. Startups can often clearly articulate their impact: innovative solutions to improve health, reduce emissions, or accelerate the transition to a more sustainable economy. However, translating that impact into the KPIs used by pension funds isn’t always straightforward. Impact measurement can clash with actual impact achievement. Should it fit neatly into a spreadsheet, or do we prioritize larger impact—even if it’s less precisely measurable?

Challenge #4: Language & Mental Models

Perhaps the most significant challenge lies in the difference in language and mental models. Startups primarily think in terms of their own impact and revenue models, while impact private equity and private debt translate these concepts into deals and fundamental analysis. However, pension funds tend to think more like academic finance professionals, considering efficient frontiers and strategic asset allocation.

The risk mindset of pension funds often relies on historical statistical relationships, struggling with transitions and other risks that cannot be deduced from time series data. This creates a significant gap between the financial world and the real economy where impact occurs—where participants build and enjoy their pensions.

Understanding each other’s ways of thinking within the investment chain would greatly help. Ideally, pension funds should develop the knowledge and skills to frame a broader understanding of risk in their investment decisions.

Challenge #5: Lack of Knowledgeable and Bold Lead Investors

A fifth challenge, which hadn’t been at the forefront of my mind before the conference, is the importance of lead investors. The search for financing is a frustrating process for many startups, marked by numerous rejections and often inadequate or conflicting feedback. Some parties claim the product is too early for the market, while others argue it’s already too late.

Many investors pay little genuine attention to the startup. They fail to inform themselves properly, remain overly focused on spreadsheets, or bring their own industry-specific logic, which may not apply. For instance, they might think in terms of a SaaS platform model and misapply it to an industrial factory.

Only a few parties genuinely do their homework and take the first step in providing financing, thereby setting the price. Once that happens, others follow suit, sometimes even oversubscribing to the deal—much to the frustration of startup founders who previously faced skepticism about their risky ventures.

Challenge #6: Short Investment Horizons

The sixth challenge relates to investment horizons. While theoretically, pension funds have investment horizons spanning decades (since participants who start working now won’t receive pensions until the second half of this century), the practical reality falls short. Private assets funds often have a 10-year lifespan but need to recoup their investments within 5-7 years. This timeframe is far too short for an industrial startup navigating two valleys of death over 15 years. So, where are the lead investors with a long-term perspective? Who are they, or who has the guts to become one?

Taking Action

Despite these serious challenges, they are surmountable. It primarily involves acquiring knowledge and cultivating mental flexibility. Entities like InvestNL and regional development agencies demonstrate how it can be done. Pension funds and academics can learn much from them. The pension conference on May 29th has inspired me to explore numerous new research questions in the coming months. Hopefully, at the second edition of the conference next year, we can present promising results. Many people have already reached out for follow-up discussions, so the dialogue continues.

Blog Series

This blog is the fourth in a series on pension investments. You can also read Blog 1Blog 2, and Blog 3

My other series focuses on CFOs and value creation within enterprises. I welcome your feedback at

Prof. Dr. Willem Schramade is Professor of Finance at Nyenrode Business University. He is part of Nyenrode's Faculty Centre for Corporate Reporting, Finance & Tax.

Nyenrode newsletter

Nyenrode shares knowledge with interested professionals. Apply to news@nyenrode for al news of Nyenrode.