Want to the advantages associated with permanent capital or working capital? Permanent capital is in the context of the relation to private equity investing.
Wherever you go, you have heard people talking about the immense benefits of having permanent capital. Different mouths, different saying but whether there are any actual advantages of acquiring permanent capital or not, we will ask you at the end of this article and you will answer yourself – “Yes” or “No“.
So before jumping into permanent capital and its advantages. Let’s start with understanding about non-permanent capital.
What is Non-Permanent Capital?
This is the type of money given by investors to managers to invest on their behalf. This generally means unit trust and hedge fund managers.
The managers have the right to put the investor’s money within the fund’s mandate, but this decision can only take place if the investor agrees on that. Moreover, the investor can get their money back within as little as a day’s notice.
Here, the net result for the manager is two times. First, they become bound to an investor for quarterly updates, MDDs ( Minimum Disclosure documents) on a monthly basis on which fund’s returns are reported.
This also means any slide in return can make investors ask for money back. Even in the recent market scenario due to COVID 19 pandemic, if an investor decides it too much to bear, he/she can request a withdrawal of their investment.
So, this creates a very bigger problem for long-term investment managers who are always supported by investors only. Investment managers worry a lot about a slip in any return against funds benchmark can make investors asking for their money back in short term.
This shifts long-term manager focus on mere a month or quarter rather than a true long term period i.e., an agreement that lasts for decades.
Now if we compare it with the recent global situation of 2020 due to the COVID pandemic, all investors wanted their money back which had made the investment managers to exit positions at the worst possible time especially when the market was tumbling. They are not left with the luxury of holding investment as capital is not permanent. Sudden requirements of funds arose and so did the need to sell the fund’s holding to give the money back to investors.
As a private investor, capital is largely permanent. We are using largely because the requirement of cash is generally in short term i.e., needed at the time of retirement mostly.
Also if the money managed is our own money then it is permanent capital. This allows investment managers the luxury of not asking for a withdrawal by investors, so there’s no need to sell.
Now in these hard times, if you hold some stock quantity then don’t worry it will recover in time. You can get hold of those if you have time and permanent capital, so you can ride out this collapse without being forced seller at any point.
So, now you know very well the advantage of having permanent capital by your side.