The significance of long-term investing has risen to prominence after the drawbacks of short-termism and myopic behaviour were exposed in the financial crisis of 2008/09. The crisis highlighted badly misaligned economic incentives, the poor performance of highly leveraged, complex financial institutions and a lack of value-add from the short-term oriented financial services sector. What was exposed most drastically in the financial crisis, was that the incentive structures of certain investment organisations, did not lend themselves well to creating real value over the long-term.
In this context, Long Term Capital is defined as the asset owner. It is the asset owners; the pension funds, the sovereign wealth funds, family offices, foundations, life insurance companies and endowments that form the building blocks of the capitalist system as the major investors in global capital markets. These types of investors can be separated from private equity firms and other asset management firms that invest on behalf of the institutional investors, sometimes criticised for their more short-term oriented behaviour.
Sovereign wealth funds (SWF) are institutional investors set up by governments and are usually funded by budget surpluses to provide long-term benefits to a nation.
Pension funds provide retirement provisions for pension scheme members and consist of either defined benefit or defined contribution systems. Defined benefit plans are required to pay a certain amount to their beneficiaries at a certain time in the future. Defined contribution plans instead, are based on contributions and the short-term performance of investments to generate a retirement annuity for plan beneficiaries.
Life insurance companies are considered long-term investors because of their requirements to pay beneficiaries or policyholders in the future. Endowments/foundations are used to fund the expenses of non-profit organisations and generally have a mandate to exist in perpetuity, providing a steady stream of income to their beneficiaries.
Family offices manage the wealth of high net worth families and have the mandate to manage wealth for future generations of family members requiring a long-term outlook for investments.
While being long-term investors, each of these types of investors have unique characteristics and risk tolerances which influences how they invest. The total amount of this long-term capital is reputed to be over $70 trillion.
Even with the large amounts of long-term capital available, the mobilization of long-term investors (LTIs) towards long-term projects is not happening. This is partly because the investment management process involves many intermediaries, such as asset managers, placement agents and consultants. These intermediaries provide expertise in information gathering and scale advantages in investment costs. The multiple layers of intermediation can create agency conflicts and misalignment of objectives. Institutional investors that exercise their long-term investing capabilities, by their inherent nature, have the ability to add significant value to society and the wider economy.