Patient Capital

Reflection on “A Compelling Case for Change”, found here: compellingcaseforchange

The reading does present a compelling case – it provides strong evidence that “short-termism” is both increasing, and acts against the best interests of both the business community and society as a whole. Again, we see the choice of metric – including the time scale with which the metric is measured – defining the behavior. And here the metric of short term gain causes a variety of distortions in the financial process that do indeed increase short term gain for a few, but do so with heavy costs in areas that are not measured by the metric – costs such as the depletion of long tem capital investment, economic stability, and a more equitable distribution of wealth.

In some sense this is not new news. Keynes identified this as a problem some years ago, saying

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes the by-product of the activities of a casino, the job is likely to be ill-done.”

It is interesting, and perhaps useful, to examine the dynamics that lead to this sort of thinking, but for now I am content to skim over this with the simple observation that it is a cycle that is self-reinforcing, and that the lure of money to be made is a powerful thing.

What we need to combat this trend are sources of capital that are seeking the opposite of short term returns. We need capital that it in it for the long haul – we need patient capital.

In Sweden we saw an interesting ownership model that provided just this sort of buffer against “short-termism”, indeed, seemed to be forcing movement in the other direction. Here, we had corporations formed as we do in the US. In terms of financial structure and governance, they were similar, if not identical to their counterparts in the US. However, the Swedish government owned them. In this ownership role, the Swedish Government became the provider of capital – very, very patient capital. I was astounded to hear during our visit to Vattenfall talk of a 50 year planning horizon, broken down into ten year implementation increments. In the US, a year out is considered long term in some firms, and at my firm, we are just starting to talk about a new, longer term strategic planning time frame – of three years!

The government can be a provider of patient capital for several reasons. First of all, it represents society, and as such, represents long term values. Secondly, the government is large enough that it can afford to be patient. It does not need immediate financial returns on capital in order to stay solvent.

It is important to be clear that this ownership mechanism is not Socialism, if only to avert the somewhat hysterical allergic reaction that such a term gets in this country. The state is not managing the enterprise, nor is a large government bureaucracy involved. The corporation is formed under a traditional capitalist model. The state is simply the shareholder with a controlling interest. Under this model, it as if the state simply bought all the companies stock and locked it away in a drawer somewhere. This model of ownership is not uncommon in the US.

In fact, the company I work for is owned as a “wholly owned subsidiary” using this mechanism. But, rather than be owned by a cash strapped firm that bought us as a source of funding and is demanding a 12% quarterly rate of return on it’s precious – and highly leveraged – purchase price, the Swedish Government can take the long view, and demand a lower rate of return over a longer time frame.

Finally, I would say that there are some in the investment community that are starting to take a different view. This is the infant “slow money” movement. While small in terms of number of investors, these are not cranks leading the movement, but rather seasoned investors with significant capital, seeking to make a decent return while building something enduring value – both financial and non-financial in the community in which they invest.

Looking at a recent draft of a working draft of a Vermont Field Research and Portfolio Model prepared for Slow Money Vermont by California Environmental Associates last year, we find the following mission statement:

• To promote entrepreneurship that preserves and restores soil fertility, appropriate scale organic farming and local food communities;
• To catalyze increases in sustainable agricultural and environmental grant‐making and mission‐related investing by foundations; and,
• To incubate next‐generation socially responsible investment strategies, integrating principles of carrying capacity, non‐violence, biodiversity and care of the commons.
These are the design principals for such a fund, currently envisioned in the $100M range:
• Investments analyzed for potential to preserve working landscapes, promote sustainable agriculture practices, and support local food communities
• Preservation of social & environmental capital upon exit (if an ownership stake is taken)
• Sustainability & conservation governance built into terms of investments
• Agnostic to financial tool (equity, debt, grants, blended)
• National coordination with funds dedicated regionally, partnering with local organizations
•Clear understanding that capital is only a piece of the puzzle. Additional programs, or partnerships to provide other resources will be paramount
• Investment thesis is based on research in Vermont, and will be replicated in other regions (though tailored for other markets)

So, while government an provide one source of patient capital to combat “short-termism”, it is clear that there is a growing sense in the investment community that short term speculative gains are not sustainable, and that in order to build enduring value, capital will have to be patient.

[originally posted at cosmo.marlboro.edu/wrobb – an E Portfolio]

About William Robb

William Robb, AKA OtherWill - no not the Will you are thinking of just now, that other one - is the main contributor to this blog
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