ALLOCATOR SERIES FOR FUNDS OF FUNDS · No. 3 of 5
Emerging or Established: Where the European Edge Sits
This is our third article in a series of five, focused on venture, fintech, Europe and fund of funds.
The data says emerging managers outperform. The structure of this market explains why — and Europe sharpens every part of the effect.
Pascal Bouvier, MiddleGame Ventures · August 2026
In the first piece of this series, we argued that a fund can be rigorously underwritten before DPI exists. This piece answers the question sitting underneath: why bother? The institutional reflex is to wait — let a manager prove itself across three funds, commit at Fund IV, sleep well. The data says the waiting is expensive, and the structure of today’s market says it has never been more so.
What the data says
The evidence is unusually convergent. An analysis of roughly 2,500 venture funds raised between 2000 and 2024 found emerging managers ahead of established ones on all three measures that matter — DPI, IRR and TVPI — by roughly 250 basis points on average. Emerging managers reach top-quartile performance about 34% of the time. StepStone’s research adds the size dimension: funds under $250 million outperform larger vehicles on net IRR, the effect is most pronounced below $100 million, and it held across cycles — including the punishing 2008–2012 stretch. And across more than 1,300 funds, specialists returned an average IRR of 15% against 11% for generalists, with the specialist edge sharpest in precisely those sub-$250 million funds. Small, specialist, early-generation: three independent datasets pointing at the same corner of the market.
Why the effect exists
None of this is mysterious once you look at the economics. A small fund is a carry business: the partners get wealthy only if the LPs do, and a single well-owned winner still moves the result. A mega-fund is a fee business in carry clothing: at scale, the management fee alone makes the partners rich, and the fund is too large to be choosy — deployment pressure quietly replaces selection. Add hunger, founder preference for engaged partners over famous letterhead, and undiluted partner attention, and the outperformance stops looking like an anomaly. It is what the incentive design predicts. Kaplan and Schoar’s persistence finding — that returns follow a team’s repeatable judgment across funds — completes the argument: judgment is most potent early, before scale dilutes it and brand substitutes for it.
The supply side has never been this favorable
Now the structural point that makes 2026 unusual. The pipeline of new managers is collapsing at the same moment capital concentrates at the top. First-time US fund formation fell to 77 funds in 2025, from 215 two years earlier. Meanwhile, twelve US firms raised more than half of all venture capital in the first half of 2025, and the top thirty took 74%. Read those two facts together: the segment of the market with the documented performance edge is being starved of competition, while the segment with the documented drag — scale — absorbs the capital. For an allocator, thinner ranks of emerging managers mean the survivors are more selected, better priced, and hungrier for institutional partnership than at any point in a decade.
Europe sharpens every part of it
The European version of this argument is stronger still, on three grounds. First, returns: Atomico’s State of European Tech 2025, drawing on benchmark data, put the European VC index at 17.2% over a ten-year horizon — ahead of US VC at 13.1% and far ahead of European public equities at 7.8%. Second, persistent under-allocation: European pension funds hold roughly 0.009% of assets in venture against 0.028% in the US, which means the inefficiency is not being arbitraged away — the capital to close it simply has not shown up yet. Third, price: European entry valuations run 30–50% below comparable US rounds at every stage. Better index returns, structurally cheaper entry, and a capital base too small to compete away either — that is the emerging-manager thesis with the dial turned up.
The institutions closest to the data have already built their programs on it. The European Investment Fund — Europe’s largest fund-of-funds investor — has made backing emerging and established managers alike a core mandate, and its VC leadership speaks openly about underwriting managers pre-DPI. Isomer Capital has assembled exposure across 80+ European fund positions. Molten Ventures runs a fund-of-funds program spanning 67+ funds; Adams Street closed a dedicated €270 million European venture fund. When the most data-rich allocators in the region keep concentrating on the same segment, the burden of proof has shifted to the skeptics.
The institutional catch — and the FoF’s role
Here is the irony that keeps the opportunity alive: most institutional investment committees still cannot commit before Fund IV, citing insufficient realized track record. That rule is not wrong about risk; it is wrong about where risk is priced. Its effect is to leave the best-performing segment of the market systematically under-capitalized — which is precisely why the outperformance persists rather than being competed away. A fund of funds is one of the few vehicles structurally built to hold this position: diversified enough across managers and vintages to absorb single-fund variance, expert enough to run the pre-DPI underwriting we laid out in the first piece. Emerging Europe is not the concession allocation in a FoF portfolio. Increasingly, it is the reason the vehicle exists.
This is No. 3 in a five-part series for allocators. Next: why AI will be good for fintech — the Ten Moats through an AI lens.
Sources
Analysis of ~2,500 venture funds, 2000–2024 vintages: emerging managers ahead on DPI, IRR and TVPI by ~250bps; 34% top-quartile incidence vs 25% baseline (industry benchmark studies, as cited in our Foundation Series No. 5).
StepStone Group, “The Case for Emerging Managers” — sub-$250M and sub-$100M outperformance across cycles (stepstonegroup.com).
Specialist vs generalist IRR (15% vs 11%) across 1,300+ funds — as cited in our Foundation Series No. 5.
PitchBook/NVCA: 77 first-time US funds in 2025 vs 215 two years earlier; 12 firms >50% and top 30 = 74% of H1 2025 US fundraising.
Atomico, State of European Tech 2025 — European VC index 17.2% (10yr) vs US VC 13.1%, European public equities 7.8%; pension allocations 0.009% vs 0.028% (stateofeuropeantech.com; reported by Sifted and Invest Europe).
Value Add VC — European entry valuations 30–50% below US at every stage (valueaddvc.com).
EIF (eif.org), Isomer Capital (80+ fund positions), Molten Ventures (67+ funds), Adams Street (€270M European venture fund) — firm disclosures and press.