Yes – ‘Patient Capital’ (PC) may be worth the lengthy drive; but it depends on one’s investment objectives and destination.
‘Patient Capital’ is a form of long-term capital investment. For market participants, it may only be attractive to those investors willing to wait at least five years for a return, which may be below market alternatives and whose non-quantitative benefits (such as a social, political or community objective) and associated risks outweigh the financial gains. Patient Capital is sometimes described as having the discipline of Venture Capital with an IRR of less than 10%! It even has been called “Impact Capital”. However, PC is also a policy for governments (such as China) and Sovereign Wealth Funds to realise their social goals.
Patient Capital one: allows an investor to drive towards the supposed greater returns of: R&D projects (invariably hard science or university spin-outs, such as Harvard or Oxford); a cause (say micro-financing, or an investor’s pet project); a community initiative (eg, a hospital); or follow-on funding rounds for enterprises that are not able to access traditional forms of capital. As importantly, the Patient Investor can play a more direct, even stewardship, role in: supporting an entrepreneur; building the management team as well as; strengthening the governance of such entities. Essentially, PC represents the “core equity” of the enterprise. Capital one can rely on as an entrepreneur to drive and build a viable business.
Patient Capital has become an emerging investment trend: a source of funding for particular types of businesses and projects as well as appealing to a certain type of investor. It is deployed across the lifecycle of enterprises, from: Seed, through Early-Stage/Ventures; to high growth small enterprises. By their nature, these assets/opportunities have limited absorption capacity for investment funds as well as an above average risk profile. Yet, the investment volumes remain small, as Beauhurst indicates.
As expected there are several main types of ‘Patient Investor’.
- Business Angels making many small investments (hundred thousand to a few million pounds sterling).
- Institutional investors making fewer, larger ticket investments (say in the tens of million) – in pursuit of their objectives. An example would be the Wellcome Trust and Syncona Partners. In addition, the likes of listed, longer-term, investment funds (eg, Woodford Patient Capital Trust, or BlackRock Smaller Companies Trust, etc) which try to balance several investment arenas.
- Finally, Family/Private Offices are attracted to PC given the appeal of its potential holistic “impact” returns. As PC practitioners claim – it is hard to find a good company so when you do, stick with it!
Some observes claim the traditionally poor performance of UK VCs is forcing it to consider a great role in PC.
The holistic returns of Patient Capital can be compelling as the financial returns are matched to realising a social objective. ResearchGate papers by Raktas and Gate Capital Group suggest the IRR returns for PC investments could be 25%, which compares favourably with VC’s 15-20%. Findings supported by Insead research.
On an annual basis a PC-return could exceed a classic ‘buy&hold’ equity strategy (17% pa).
- The institutional funds focused on PC (such as Woodford and BlackRock) have lower and varied returns for their own structural reasons and vagaries of the public markets.
- Theses funds’ focus is in the long term, thus even negative returns (such as as in Woodford’s case) are marketed away as shorter-term volatility for longer term superior gain; to be seen. The risks, as ever, are in: valuations, timing, portfolio composition, hubris and hype. BlackRock’s approach is more measured and its historical returns reflect that.
- The PC model seems better than the VC one of 5-year investment horizons, 2/20 and IRR of 15%. The key parameters are: risk, time and control. Patient Investors must assign probabilities to the hoped for 0-1-10-100X returns of original investment.
That being said there is a definite gap in the finance market for Patient Capital, especially in the UK; playing catchup to the government initiatives of European markets and ‘super angel’ networks of the US. China and Asia are emerging markets.
In conclusion, Patient Capital is not for everyone. Yet, if an investor is:
…comfortable with the time-horizon and risk-profile of the asset/investment/activity; and…
…has an interest in building a ‘better society’ (however defined); as well as…
adding to one’s bank balance then…
…Patient Capital is worth the wait.
Do read my other blog entries!
Justin Jenk is business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or www.raktas.ee