For business owners seeking capital, and for investors looking to increase their allocations to private markets, there are different alternatives available, including engaging with traditional private equity firms or seeking out “patient capital,” sometimes referred to as “families investing in families.”
Private equity is familiar to most entrepreneurs and investors. Typically, private equity is looking to invest in private businesses for a finite amount of time, usually 4-5 years, and then return the capital invested back to investors. Sometimes referred to as being on a “shot clock,” that approach can be the right solution in many situations, as some have demonstrated over time with the attractive investor returns generated by the private equity asset class. At the same time, these are important ramifications that should be considered by both business owners receiving the capital and investors and that suggest considering an alternative approach in certain situations.
The concept of patient capital may be less familiar to business owners and investors. Essentially, patient capital is just that – patient. There is no effective “shot clock” as with private equity, as the capital is typically pooled from families who have a long-term orientation toward their investing objectives and are primarily focused on seeing the businesses they invest in grow, mature, and compound in value over an extended time horizon.
We recently connected with Chris Boehm of Cresset Partners to further delve into how private equity and patient capital compare and what business owners and investors need to know:
Chris, can you provide additional perspective on the differences between traditional private equity and this concept of “patient capital”?
As alluded to above, the primary differences relate to the time horizon and mandate of the underlying investment vehicles. Traditional private equity funds are structured with a finite period of time for investments made by the partnership to be monetized and proceeds returned to investors. Material amounts of financial leverage are often utilized to enhance IRRs, and there are various incentives for private equity fund managers to sell successful investments within 4-5 years. These structures and inherent incentives can lead to a focus on a targeted set of value-creation initiatives that can be created in that short holding period, introducing the risk of shorter-term decision making and loss of operational flexibility for traditional private equity portfolio companies and the leadership teams that run them.
By contrast, patient capital of the type invested by family offices and other institutions with extended investment horizons typically has either no finite time period in which investments must be monetized or a significantly longer time horizon than traditional private equity capital, allowing for longer-term strategic decisions, openness to more transformative value creation, and a more deliberate approach to value creation. Further, since patient capital providers often are more focused on long-term compounding to achieve compelling multiples of invested capital, there can be more of an orientation toward utilizing lower financial leverage to reduce risk and increase flexibility.
Cresset often describes its private investing approach as “families investing in families.” Why is this often better for business owners seeking capital?
Cresset has been built for individuals and family offices to access sophisticated and unique private market investment opportunities that historically have only been available for large institutions. Working with a broad range of family business owners, senior executives, founders, entrepreneurs, and other innovators and wealth creators, Cresset has close relationships with many clients and investors who have built their own wealth through business ownership. These families have a strong appreciation for the type of focus and execution that is required to grow a business and successfully build sustainable value. Aligning the patient, long-term investment goals of Cresset’s families with business owners who are seeking a capital partner to support growth and value creation works very well in circumstances where a business will benefit from the ability to make broad strategic decisions to maximize long-term value rather than focusing more narrowly on shorter-term investor returns. For business owners with this orientation, Cresset’s “families-investing-in-families” approach can be the foundation for a successful long-term partnership.
How about for investors? What benefits does this idea of patient capital provide to them?
We believe investors who have the ability to take a longer-term view and focus on compounding growth can be rewarded with attractive risk-adjusted returns. By supporting businesses with flexible and patient capital with fewer constraints associated with shorter time horizons or with financial leverage, investors can provide business owners and executive teams with more flexibility and executional latitude to make long-term investments in new geographies, end markets and product and service offerings; expand manufacturing or service capacity at existing and new facilities; and explore strategic add-on acquisitions or business combinations. Further, those companies benefit from a patient investor base by being able to build leadership and next-generation talent on their teams and to invest in infrastructure and technology tools that allow smarter decisions in the market with greater emphasis on sustained value creation rather than immediate near-term profitability. As that long-term value is created in a business, the company’s owners can choose the timing and means of monetizing their investment to optimize and maximize value free of any arbitrary time-frames.
Clearly there are advantages that come with patient capital. How does a business owner or investor get started?
For business owners seeking capital, the key is to have a clear understanding of the goals and objectives for your company, the time horizon you believe makes most sense to execute your strategy, and the type of partner you want at your side going forward. With that clarity and with advice from trusted and experienced advisors, you can smartly evaluate alternatives and work with different potential partners to put in place the right solution for you and your business.
Similarly, investors looking to incorporate longer-term investments into their portfolio allocations should consult with their advisor to understand the magnitude of capital they can commit to these strategies and how they would fit with other private and public market investments already in their portfolio. We believe there are compelling opportunities to create attractive risk-adjusted returns from patient, long-term private investments, but investors need to start with a realistic appreciation for risk and liquidity and how these types of investments fit with their goals.
To learn more about Private Investment Opportunities, please contact us
Cresset refers to Cresset Capital Management, LLC and all of its subsidiaries and affiliates. Cresset Asset Management, LLC provides investment advisory, family office, and other services to individuals, families, and institutional clients. Cresset Partners, LLC provides investment advisory services strictly to investment vehicles investing in private equity, real estate, private credit, and other investment opportunities. Cresset Asset Management, LLC and Cresset Partners, LLC are SEC-registered investment advisers.
