Strengthen pension funds’ investment opportunities in unlisted biotech

Numerous analyses and reports highlight the European innovation gap, often pointing out that the EU is better at regulating than investing and innovating. While many well-meaning and reasonable proposals for long-term structural solutions have emerged within the EU, there’s a risk that opportunities will slip by as time is spent deliberating rather than implementing new growth initiatives. A concrete opportunity lies in pension funds actively contributing by investing directly in unlisted biotech companies.

A sector like life science and pharmaceutical research, where developing new products and technologies is expensive, requires substantial financial resources. Pension funds could play a pivotal role here by offering relevant financial instruments. Their primary responsibility is to secure returns for their members, but they could also contribute to a positive trajectory for Danish and European life science and innovation capacity. Despite past examples where Danish pension funds, with limited success, have made large single investments in unlisted companies to boost European competitiveness—such as in car battery production—there remains significant potential to achieve both long-term returns for members and societal gains in life science.

However, certain prerequisites must be met to make unlisted biotech investments both feasible and attractive for pension funds and their members.

First, there must be an adequate level of risk diversification. Investments in individual companies carry the potential for high returns but also significant losses. Alternative models or arrangements involving many unlisted companies in a shared investment pool could spread the risk. Moreover, shared evaluation tools, management, and control systems could reduce the need for specific expertise in individual technologies or market areas, thereby ensuring that pension funds do not assume substantial unforeseen risks.

Secondly, the size of the investments must align with the criteria of pension funds, ensuring that resources and transaction costs are proportionate to expected returns. Small, sporadic investments in individual companies are not attractive to institutional investors; therefore, opportunities for large allocations are necessary. A model involving many unlisted companies within a unified investment framework could meet these requirements, especially if favorable conditions for bilateral trade of unlisted shares are established.

Finally, it must be economically attractive for pension funds and their members to invest in unlisted biotech companies—not just because it benefits society but also due to financial incentives, such as long-term return potential, possibly combined with tax breaks or advantageous public loan and/or co-financing measures.

The above prerequisites are not unrealistic and align well with Danish conditions, including strong research environments, a highly educated workforce, and commercial experience within a productive life science industry. Many in the industry are currently discussing the need for new and alternative investment models to fund the development of innovative pharmaceuticals and how to rethink the ecosystem to make it easier and faster to turn innovation into commercialization. Encouragingly, there are indications that specific Danish initiatives are on the verge of being introduced, allowing pension funds to contribute positively.
However, this will require courage and determination from political leaders and relevant stakeholders to back these efforts with action and support. New initiatives must not be stifled by regulatory constraints, passivity, or European bureaucracy.