What is it?
Patient capital does not have a rigid definition, but generally refers to investment that is prepared to wait a considerable amount of time before seeing returns. Very roughly speaking, "a considerable amount of time" means five years at minimum.
Why is it in the news?
HM Treasury and the Department for Business, Energy, & Industrial Strategy (BEIS) has just launched its Patient Capital Review. This is an investigation into the state of patient capital as it exists in the UK at the moment, particularly with regard to young high-growth firms who wish to scale.
A broad distinction can be drawn between institutional patient capital and that which comes from non-institutional sources, such as angel networks and crowdfunding platforms. The majority of patient investors, in fact, are non-institutional – but institutional investors typically have much more money to invest. Our analysis below focuses only on institutional investors.
As of 1st August, a consultation (Financing Growth In Innovative Firms) is open to responses from businesses and industry bodies as part of the Patient Capital Review. The consultation presents the evidence, much of which is drawn from Beauhurst data, for a lack of patient capital in the UK. Beauhurst will be drafting a response with our thoughts on how patient capital is most useful in supporting high-growth companies, and we welcome insight from other industry professionals as part of it.
What does it look like?
We took a sample of six institutional funds characterised by their willingness to wait: Woodford Patient Capital, IP Group, Touchstone Innovations, Oxford Sciences Innovation, Draper Esprit, and Invesco Perpetual. Then we compared their investments to those of other private equity and venture capital firms.
We found that at every stage of company development, patient capital firms took a greater proportion of equity from their investees. The gap diminished only at companies' latest stage, which makes intuitive sense: more mature firms are likely to have milder preferences for capital that is prepared to settle in for the long-term.
Investments from patient capital funds also tended to be larger than those from non-patient capital funds:
Finally, we found that the pre-money valuation of firms backed by patient capital funds was on average 1.8x the valuation of those firms not backed by patient capital: £23.4m compared to £12.8m, respectively. These are broad averages, and do not take into account companies' sectors or stages of evolution, both of which affect valuation.
Nonetheless, the difference is striking, and it is clear that the Patient Capital Review stands to shed light on an underexplored area of equity finance.
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