So before jumping into permanent capital. Let’s start with understanding – 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 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. In the current market situation due to COVID 19 pandemic, if an investor decides it too much to bear can request a withdrawal of their investment.
So, this creates a very bigger problem for long term investment managers who is always supported by investors only, worries a lot about a slip in any return against funds benchmark can make investors asking for their money back in short term.
This makes long term manager to focus on mere a month or quarter rather than a true long term i.e., an agreement which lasts for decades.
Now if we compare it with the current global situation 2020 due to the COVID pandemic, all investors want their money back. which makes the investment manager needed for exit positions at the worst possible time when market tumble. They are not left with the luxury of holding investment as capital is not permanent. Sudden requirements of funds arise and need to sell the fund’s holding down to give it back to investors.
As a private investor, capital is largely permanent. Largely because the requirement of cash is generally in short term i.e., nearing or in retirement phase.
But the money we manage is our own money then it is permanent capital. This allows managers the luxury of investors not asking for a withdrawal, 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 onto 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 it very well the advantage of having permanent capital by your side.