Patient capital
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Patient capital is an approach to investing where investors are willing to wait longer for a return on their capital. It is a form of long-term, value-oriented investing that tends to focus on the fundamentals of a company, such as its financial viability, rather than short-term market pressures. Patient capital is often used in venture capital, private equity, and other forms of alternative investing.
Patient capital has several distinct advantages over other forms of investing. First, it allows investors to benefit from the long-term potential of a company, as well as any short-term gains. This also allows investors to benefit from the compounding effects of their investment over time. Second, patient capital allows for more flexibility in the structure of the investment, such as the ability to add or subtract funds from the original investment. Third, patient capital is often used to support emerging companies and technologies with longer-term growth potential, which can lead to significant returns over the long-term.
Finally, patient capital is often used to support businesses that may not be able to access traditional forms of financing. This allows these businesses to access capital that may otherwise be unavailable, which can help them grow and thrive.
In summary, patient capital is an approach to investing where investors are willing to wait longer for a return on their capital. It has several distinct advantages, such as the ability to benefit from the long-term potential of a company, more flexibility in the structure of the investment, and the ability to support emerging companies and technologies with longer-term growth potential. Additionally, patient capital can provide access to capital for businesses that may not be able to access traditional forms of financing.
Example of Patient capital
An example of patient capital is venture capital. Venture capital is a form of long-term investing in which investors provide capital to early-stage companies with high growth potential. The venture capital firm typically takes a hands-on approach to the investment, providing not only financial capital but also strategic advice and resources. The investors are typically willing to wait several years for a return on their investment and are expecting to benefit from the potential long-term growth of the company.
When to use Patient capital
Patient capital is most suitable for investments that require a longer-term outlook, such as investments in emerging companies, technologies, and markets. It is also useful for investors who are looking to benefit from the compounding effects of their investment over time. Additionally, patient capital is often used to provide financing to businesses that may not be able to access traditional forms of financing.
Types of Patient capital
Patient capital comes in a variety of forms, including venture capital, private equity, and other forms of alternative investing.
- Venture capital is a form of patient capital that invests in startup companies and helps them grow and develop. Venture capital firms usually provide capital in exchange for equity in the company, and require significant involvement from the venture capital firm in the management of the company.
- Private equity is a form of patient capital that invests in established companies, often with a focus on restructuring and turnaround opportunities. Private equity firms often take a controlling stake in the company and have the ability to make significant changes to the company’s operations and strategy.
- Other forms of alternative investing include hedge funds, real estate investing, and debt investing. These forms of patient capital can provide investors with exposure to a variety of asset classes and strategies.
Advantages of Patient capital
Patient capital has several distinct advantages compared to other forms of investing. These include:
- The ability to benefit from the long-term potential of a company, as well as any short-term gains due to the compounding effects of their investment over time.
- More flexibility in the structure of the investment, such as the ability to add or subtract funds from the original investment.
- The ability to support emerging companies and technologies with longer-term growth potential, which can lead to significant returns over the long-term.
- The ability to provide access to capital for businesses that may not be able to access traditional forms of financing.
Limitations of Patient capital
Despite the many advantages of patient capital, there are also some limitations to consider. First, patient capital often requires a longer time frame for a return on the investment, which can lead to a risk of underperformance compared to other investment vehicles. Second, patient capital requires more due diligence in order to ensure that the company is financially viable and has the potential for long-term growth. Third, patient capital can be difficult to access for some investors due to the higher minimum investment requirements, as well as the need for specialized knowledge. Finally, patient capital can be subject to liquidity risk, meaning that investors may not be able to access their funds in the event of a market downturn.
Other approaches related to patient capital include impact investing and venture debt. Impact investing is a form of patient capital investing where investors seek to generate both a financial return and a positive social or environmental impact. Venture debt is a form of debt financing used by startup companies, often in conjunction with venture capital. It is a form of patient capital, as it allows investors to benefit from the long-term potential of start-up companies without taking on the full risk of equity financing.
In summary, other approaches related to patient capital include impact investing and venture debt. Impact investing is a form of patient capital investing that seeks to generate both a financial return and a positive social or environmental impact, while venture debt is a form of debt financing used by startup companies that allows investors to benefit from the long-term potential of start-up companies without taking on the full risk of equity financing.
Suggested literature
- Deeg, R., & Hardie, I. (2016). What is patient capital and who supplies it?. Socio-Economic Review, 14(4), 627-645.
- Cremers, M., & Pareek, A. (2016). Patient capital outperformance: The investment skill of high active share managers who trade infrequently. Journal of Financial Economics, 122(2), 288-306.
- Deeg, R., Hardie, I., & Maxfield, S. (2016). What is patient capital, and where does it exist?. Socio-Economic Review, 14(4), 615-625.
