What Is ‘Patient Capital' for Financial and Non-Financial Actors?

Since the late nineties, studies on financialization in corporate governance have criticized the short term orientation of the ‘downsize and distribute’ strategy conducted by non-financial corporations. The aim of this paper is to provide a definition of a patient capital able to reduce short termism of non-financial firms. It is a tricky issue: while there is no legal definition, there is an academic and political consensus to say that there are growing needs for long-term financing.

We review recent debates on short term and long term behaviour in corporate governance literature and we explore what is patient capital for financial and non-financial actors. This will be done in two steps. We first study semi-structured interviews of 71 stakeholders of the financial industry including the standard setters, supervisors and advisors, in France, Belgium and the United Kingdom, to understand both their representation of long term capital and the potential short term regulatory bias that prevent them to behave as a long term investors. Then we complete these interviews by analysing the 292 responses received to the public consultation of the Green Paper on long-term financing of the European countries published in March 2013 by European Commission. This study is interesting to describe what is “patient capital” for financial and non-financial corporations. Indeed, among the topics discussed in this Green Paper are included the definition of long term investment and the recent regulatory reforms and their impact on long-term investment. On the basis of these responses, we propose that defining patient capital requires combining three complementary dimensions: the nature of the assets to be financed, the nature of necessary resources and actors able to provide long term capital, and the behaviour of providers of this capital.

Finally, we explain why some institutional investors which are potential patient capital providers do not act as such. The culprit is liquidity and the competitive organization of financial markets where actors compare themselves: because of continuous revaluation on markets, an assets’ holder undergoes the risk of a drop in the value of its assets unless they deliver as much incomes streams as other assets on the market. Even though the counterpart behind the financial asset may be a long term real asset, self-referential financial markets incite long term capital to behave like impatient capital (especially when long term capital providers delegate asset management while competition among money managers leads to put short-term financial pressure on firms).

We derive some policy implications to channel capital towards long term interests of non-financial corporations. It is necessary to monitor liquidity of financial markets in order to promote commitment of shareholders for non-financial firms and to not deter real investment. A proposition may be to organize a new asset management delegation carried out by public asset managers instead of private asset managers which are constrained by competition on liquid financial markets. Our proposals are in line with the necessity to build a new entrepreneurial state (Mazzucato, 2015).