Patient Capital: The Challenges and Promises of Long-Term Investing

by Victoria Ivashina, Josh Lerner

How to overcome barriers to the long-term investments that are essential for solving the world's biggest problems

There has never been a greater need for long-term investments to tackle the world's most difficult problems, such as climate change and decaying infrastructure. And it is increasingly unlikely that the public sector will be willing or able to fill this gap. If these critical needs are to be met, the major pools of long-term, patient capital--including pensions, sovereign wealth funds, university endowments, and wealthy individuals and families--will have to play a large role. In this accessible and authoritative account of long-term capital investment, two leading experts on the subject, Harvard Business School professors Victoria Ivashina and Josh Lerner, highlight the significant hurdles facing long-term investors and propose concrete ways to overcome these difficulties.

Presenting the best evidence in an engaging way by using memorable stories and examples, Patient Capital describes how large investors increasingly want and need long-run investments that have the potential to deliver greater returns than those in the public markets. Yet success in such investments has been the exception. Performance has suffered from both the limitations of investors and the internal structure of their fund managers, often resulting in the wrong incentives and a lack of long-term planning.

Yet the challenges facing long-term investors can be surmounted and the rewards are potentially large, both for investors and society as a whole. Patient Capital shows how to make long-term investment work better for everyone.

Genres: Finance, Business, Nonfiction, Economics

264 pages, Hardcover

Published September 24, 2019

Reviews

[Anil Shrivastava · Rating 3 out of 5]

Good history of investment strategies and returns by families and institutions looking for patterns of where being patient created enormous wealth; many times for worthy causes. Discusses the rise of the current equities focus for endowments and foundations.
The recommendations to become and manage a patient investment strategy however to me seemed too straightforward to warrant the second half of a whole book. Perhaps would be better as an article or a series of seminars or even a set of presentation slides.

[Nick Ellenoff · Rating 4 out of 5]

“If the Devil can quote scripture, in his spare time he may be working on [private capital] return methodology” – Bill Elfers

Very few academic books, especially those in finance, do a good job of understanding the reality of markets. They normally start with some academic theory and they dive into details of where that theory holds, but why occasionally under XYZ situations it breaks. Patient Capital is the rare bit of academic literature that throws theory out the door to begin with, instead starting with a question: how do we best structure private capital markets for long-term investing strategies? Ivashina & Lerner open with an accurate portrayal of the market landscape before diving into empirical research as to why markets are structured as is and what the outcomes of those structures creates and how they can be improved.
The book is strongest when it’s surveying the history of pooled private capital vehicles and describing the incentives of the participants around the table. It does an excellent job of including fun anecdotes about endowments, family offices, funds and individual deals while pairing those stories with empirical studies. One of the strongest endorsements I can give is that it gets the details right while staying entertaining and understandable for a layperson.
It's especially good at diagnosing the areas of misaligned incentives in the industry without creating any boogeymen and without catastrophizing or failing to acknowledge that overall it works quite well. This isn’t an armchair academic poking holes in the system from afar, this is someone that understands the details and genuinely wants to find a better way. Here’s their excellent summary of the core problems of the industry:
“Some of the problematic issues can be laid squarely at the feet of the families and institutions who ultimately control the funds:
• Inadequate incentive schemes to reward staff members for making the right choices for long-term performance.
• Poor processes for selecting investments, based more on the safety of a familiar brand name or the fashionable nature of the area rather than the nature of the investment. This is often driven by boards and advisers who do not steer in the right direction.
• A lack of tools for measuring their own financial position, whether the extent of their need for future capital, the amount of risks they are exposed to, or even in some cases how well they are doing and the extent of their holdings.
• A failure to effectively communicate what they are doing to stakeholders or potential partners, which in turn creates a cascading series of difficulties.
Other issues, though, must be laid at the feet of the investors who are managing funds seeking to undertake long-run investments:
• Inappropriate incentives that lead to the temptation to increase assets under management relentlessly, even if it translates into lower returns for the investors managing the funds (albeit not to the fund managers themselves).
• The gaming of performance, which makes traditional performance metrics—at best, often limited and flawed—even less revealing.
• The exploitation of market power by established private capital groups and a lack of coordination among investors who, desperate to access an attractively performing fund, bypass many of the principles of good governance (ironically, the same governance principles that fund managers insist on in the companies in their portfolios).
• Concentration of power among the founding partners and a broader lack of fairness within the partnerships, leading to defections and attenuation of investment success over time.”
Most of the book is delving into each of these points with colorful examples and academic research. Some of the books key points like the incentive misalignment around growth ended up becoming all the more important in the intervening years after the book was published.
Suffice it to say, I agree with almost all of the survey section (90%+ of the book) from observing the markets first hand. And from that alone I found the book valuable. But I was going in looking forward to the last chapter of the book: The Future of Long-term Investing. Wanted to hear if the team had any novel theories on better vehicle structures, governance, reporting.
But the last chapter left a lot to be desired. It was mostly a reiteration about the focus of alignment between LPs and their managers including instituting better governance (without details as to what better entails) and thinking more deeply about incentivizing employees correctly. Frankly, all very worthwhile things to point out for LPs given the fact that so few do a good job on either of those things. But not all that interesting from a fund management perspective.
I’d strongly recommend the book for all people looking to move into an LP seat or just wanting to understand the private capital markets better, but its far from game changing or novel in its recommendations. That being said, sometimes just a reminder to do the basics is all that people need.

[Lukasz]

recommendation: https://blogi.bossa.pl/2020/01/20/zar...

[Allan · Rating 4 out of 5]

Very good overview of challenges - and some idea of solutions - to getting a more efficient long-term private capital investment environment.

[8art33z]

Recommendation: https://kryptolog.eu/