Meng Fanxin: How to Foster Patient Capital
In the past two years, "patient capital" has become a buzzword. Following the proposal at the April 2024 meeting of the Political Bureau of the CPC Central Committee to "actively develop venture capital and strengthen patient capital," the term has been mentioned on multiple important occasions. The Central Economic Work Conference [1] proposed to improve the multi-level financial services system, strengthen patient capital, and intensify efforts to attract private capital into venture investment. So, what is patient capital? Why can capital have "patience"? And why do we need patient capital even more at the current stage? As the name implies, patient capital is a type of capital that focuses on long-term investment and has a high tolerance for risk. It is a concept often confused with "long-term capital," though the two are both linked and distinct. While the latter primarily emphasizes the duration of capital use, the former not only includes the characteristic of long-term holding but also emphasizes high risk tolerance, endurance for short-term market fluctuations, and long-term confidence. Patience is a value choice regarding long-termism, containing within it a dialectic of time.
Some believe that because capital is profit-seeking, its instinct is to chase short-term gains and "fast money," and thus true patient capital does not exist. To oppose the profit-seeking nature of capital to the maintenance of patience is, in fact, a misunderstanding. Granted, patient capital is first and foremost capital; it indeed possesses the general characteristics of profit-seeking, mobility, and risk. However, the laws governing returns on capital dictate that it will also look toward long-term expectations and maintain a high tolerance for risk. Of course, the formation of patient capital requires certain conditions. Some believe there must be a cultural tradition of long-term thinking; others argue for a stable long-term inflationary environment and stable micro-level expectations. In fact, the "patience" of capital stems primarily from two sources: one is a sense of long-term purpose derived from an insight into the processes and risks inherent in the transition from technological innovation to industrial transformation; the other is the establishment of a "community" [2] between investors and innovative enterprises. This ultra-long-term capital, invested in "relationships," allows a portion of capital to break away from the "fast-in, fast-out" profit-seeking model and enter the camp of patient capital, accompanying enterprises across the "Valley of Death" [3] of innovation.
The "Valley of Death" phenomenon in technological innovation is universal across the innovation activities of all nations. The journey of technological innovation—from theoretical breakthrough to R&D, then to pilot testing and verification [4], and finally to marketization—is a long process full of uncertainty. It requires capital to act as a "running mate" in a marathon, providing continuous financial support. The investment philosophy of patient capital is highly consistent with the internal laws of technological innovation. Patient capital possesses the strategic resolve to exclude short-term disturbances. It can provide a long-term source of funding for "0 to 1" [5] original and disruptive early-stage technological innovations as well as their market applications. It can more accurately match the needs of technological innovation in terms of time, space, and the full life-cycle development of the enterprise, and even participate in the process of value creation. Therefore, patient capital is also called a "friend of time," becoming an intimate partner accompanying the development of "hard tech." We observe that abroad, many disruptive innovations are accompanied by the intervention of early-stage capital and long-term companionship throughout their life cycle.
Currently, the development of China's real economy is accelerating its shift from factor-driven to innovation-driven growth, and will increasingly rely on the leadership and mobilization of new quality productive forces. The development of new quality productive forces depends on innovation, including technological, institutional, and management innovation, but technological innovation is the core. New quality productive forces can only achieve widespread development if original and disruptive technological innovations emerge in quick succession. To solve the problems of "lack of long-term money" and "no rice for the pot" [6] in technological innovation, to cultivate and strengthen new quality productive forces, and to achieve high-level technological self-reliance and self-strengthening, we must have more patient capital.
Although China currently lacks patient capital, it does not lack the potential and foundation to grow it. Of course, transforming potential into reality and directing patient capital toward "innovation" remains a long-term task and a systematic project.
First, we must nourish patience with a predictable investment environment. The market environment guides capital flows and influences investment behavior, values, and social norms. The "patience" of patient capital does not appear out of thin air; it requires a high-standard market environment governed by the rule of law. To this end, we must improve the social credit system and regulatory regimes, increase market transparency, maintain market fairness, justice, and stability, preserve the continuity, stability, and predictability of policies, and cultivate a culture of long-termism in the capital market.
Second, we must attract patient capital with high-quality investment targets. Supply and demand are interdependent and mutually influential. Respecting the operational law of capital—the pursuit of maximum investment value—means providing high-quality investment objects that can be held for the long term and protecting the motivation of capital to flow toward those innovative technologies that can bring high returns. Therefore, we must play the "preemptive move" [7] of technological innovation well, cultivate innovative subjects through multiple measures, establish matching mechanisms between venture capital and innovation projects, and guide venture capital institutions to invest in high-quality projects that align with the nation's developmental direction and strategic orientation.
Furthermore, we must strengthen patient capital within the "virtuous cycle of technology, industry, and finance." Patient capital must not only accompany technological innovation but also grow continuously by promoting this virtuous cycle. In this process, capital must be invested in technological innovation, and R&D results must be grounded in industry. We must promote the industrialization and commercialization of technological innovations, achieve synergy between technological and industrial innovation, and subsequently feed back into the financial market. This realizes the value return on the long-term companionship of patient capital, thereby promoting a sustainable virtuous cycle among the three.
Finally, to make more capital patient, we must give full play to the leading role of state-owned capital. State-owned capital and government investment funds possess advantages such as high capital density, stability, and long-term orientation; they are naturally suited to play the role of patient capital and can serve as the "ballast stone" [8]. We should improve evaluation mechanisms from a full-life-cycle perspective, set reasonable fault-tolerance rates, and push state-owned capital contributions to become more responsible patient capital. At the same time, we should continuously optimize support policies across the entire "fundraising, investment, management, and exit" chain of venture capital, giving full play to the role of the government's "visible hand" to guide and incentivize more private capital to "invest early, invest small, and invest in hard tech."
(The author is a special researcher at the Beijing Research Center for Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era and an Associate Researcher at the Management Institute of the Beijing Academy of Social Sciences)
Source: Economic Daily (January 8, 2024) Web Editor: Hui Hui