What Is Patient Capital, and Who Supplies It?

Abstract

In comparative political economy (CPE), ‘patient capital’ (‘PC’) – primarily from relational banks – is central to categorizing national economies. Yet the rise of ‘market-based banking’ highlights the growing inability of commercial banks to be patient. This raises the question of whether alternative forms of PC exist, but CPE lacks a framework to consider PC provision by financial markets. We develop our concept of PC and a framework for determining the investors most likely to provide it - and under which conditions. We define PC as equity or debt whose providers aim to capture benefits specific to long-term investments and who maintain their investment even in the face of adverse short-term conditions for the firm. We argue for determining patience though three questions:

1. Is the investment (loan) anticipated to be short or long term?

2. Is the investor engaged with management in pursuit of short-term share price performance or creditworthiness?

3. What is the likelihood of exit because of concerns regarding short-term performance?

Our framework lays the a cornerstone for a new comparative theory of financial systems.

Keywords: corporate finance, financial institutions, financial markets, comparative political economy, varieties of capitalism

JEL Classification: G20, G32, P16