Patient Capital

Posted in Finance, Accounting and Economics Terms, Total Reads: 69

Definition: Patient Capital

Patient capital is long term capital investment in which the investor is not looking for short term returns but is willing to wait for a long time and forgo immediate returns. The returns in patient capital may be below the market rate and not as high as one can expect while investing using this type of investment. Patient capital has low risk if a person invests in an organization that is environmentally as well as socially responsible, the investor is expected to have a lower return on investment compared to the market rate.

The investor should regularly research about the organization and be in the loop about the organization’s financial health because the investor can end up losing either a substantial amount or all the investment in the organization. The main objective behind patient capital is not to maximize returns on investment but to have a social impact like combat poverty, create jobs etc.

Importance of Patient Capital

Patient capital helps in maximizing social and environmental changes. Patient capital can be used to solve tough problems like healthcare, alternative energy, poverty etc. Patient capitalism is often said to be a cross of philanthropy and traditional venture capitalism. So for an investor who would like to make a profit from the investments and also like to help the society at large, patient capitalism is a good avenue to invest the extra savings and also contribute for the greater common good. The characteristics of a person willing to invest in patient capitalism is that

1. The person is willing to forgo immediate returns for long term returns which are expected to be lower than the market rate but the investment will have a social impact and is ideal for philanthropists.

2. The person has greater tolerance for risking investments and does not end up losing all the his/her savings.

Patient Capital

Difference Between Patient Capital & Venture Capital

Venture capital is providing funds to start ups, early-stage emerging firms which show the potential of high growth in the future. They invest money in exchange for equity in the company. It is much riskier as compared to patient capitalism because start ups face uncertainty and the failure rate of startups is very high, only a small percentage of startups succeed in becoming established businesses.

Example of Patient Capital

A invested money in an organization and had a horizon of ten years to stay invested in the organization, the company had high potential of growth and A has decided to forgo immediate returns A knows that the returns may not be as high as compared to investing in a different organization or with a different strategy, A also wanted to do some philanthropy work and the organization is playing an important role in solving the water crisis in Africa. So A is able to fulfill both those desires by using the strategy of patient capitalism.

Hence, this concludes the definition of Patient Capital along with its overview.

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