Patient capital made simple?

I read the Pensions and Lifetime Savings Association’s recently published Made Simple guide on the topic of ‘Patient Capital’.

This surely takes the biscuit for downright woolly thinking. Perhaps we don’t expect more from asset managers with vested interests, so it’s more depressing that this has come from an independent industry body who should be taking the wider perspective. 

The guide ‘aims to demystify the concept of patient capital and private markets investing.’ Well, I have a mystery of my own: why is it that we don’t get beyond the first page before we carelessly equate ‘patience’ to ‘illiquidity’, and by the second page we have skipped directly to the substitution of ‘private markets investments’ for the phrase ‘Patient Capital’?   

It’s clear that the endemic short-termism of capital markets is a major problem to the fundamental job of capital deployment and wealth creation, but it’s not clear that focusing on liquidity is the solution. ‘Patient Capital’ is not an asset class, it’s a state of mind. Just because an asset can be readily traded doesn’t mean it has to be. The guide goes on to say that ‘patient capital investments are generally expected to have a holding period of several years, unlike shorter term investments such as public equity.’ So public equity is now by definition a short-term investment? WTF? 

There’s nothing wrong with private equity investing. In fact, as firms come to market later and are less capital intensive, it’s pretty much a necessity for growth investors to set about gaining exposure in this area. At Baillie Gifford we’ve invested over $2bn for clients in unlisted companies, but the fact they’re unlisted is really neither here nor there. There are a few companies with great long-term blue-sky growth opportunities. Some of them are listed and some of them aren’t. What matters is that they have strong management with credible execution plans, long-term funding to get to profitability, and supportive shareholders who understand the vicissitudes of trying to build a company. 

Private equity investing is an increasingly important topic for investors.

Another highly questionable assertion is that ‘private markets… inherently have a longer term holding period (4-7 years on average).’ Well, there are plenty of secondary market speculators out there who may churn the portfolios like there’s no next week, but there are also listed equity growth strategies with significantly longer average holding periods than 7 years. I cannot emphasise this enough: long term investing does not equate to private markets.  

Lastly, costs. The guide suggests that private market investments ‘require active management to create value whereas investors in a public markets stock are much less hands-on, for example attending and voting at an Annual General Meeting is the greatest involvement’. Leaving aside the mangled phrasing, it’s not true. Good listed equity investors spend huge amounts of time engaging with their investee companies on all manner of topics. In fact, if that time is spent encouraging management to resist the short-termism of other shareholders, it’s one of the most important elements of the whole process. Justifying higher fees for private market investors on this basis just doesn’t stand up. It’s not clear to us why investing in private equity alongside listed equity should necessarily carry any additional fees – or indeed carry. Why should it? It’s the same fundamental task. (In fairness, we’re not mainly investing in very small venture capital opportunities where the governance burden probably is proportionately higher, but then neither is most of the private equity industry). 

Private equity investing is an increasingly important topic for investors. It most likely should form part of an overall investment approach. But Patient Capital is not the same as illiquidity. Patient Capital is sensible long-term investing. Listed or private. In fact there’s a whole host of good reasons for combining listed equities and private equities in one fund, but that’s a blog for another day.

Want to share your views on this post? Email [email protected].

Stuart Dunbar

Partner

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