Why our economy is failing and how we can fix it - Part 3 - Patient Capital
Paul Bulkeley
Founder Snug Architects. Founder of BizMin and author of the BizMin Course. Husband, father, cyclist, sailor.
In my last article I coined a phrase - ‘the money goes where the money grows’. A truer statement these days would be ‘the money goes where the money grows quickly’.
At the heart of the nations current economic woes is a steep decline in the supply of money. The great money tree has most definitely been in winter this summer. But where did the money go. The short answer is into AI investments and their like in the US. The longer answer is, well, longer. Longer lasting in its impact and longer ago in its roots.
Part of the challenge is that the English banks stopped lending because The Bank of England stopped quantitative easing. The real reason however has deeper roots.? Banks only lend when the economy is growing because in those circumstances their risks are basically zero.
Back in 2003 I was a recent graduate with nothing but optimism and a very simple business plan. A bank lent me a whopping ￡250K because I had a half decent plan to build two houses. They lent me the money and a year later I paid it back with interest. Importantly everyone was at it in those days. The banks had little doubt that even I could steward their money. I learnt an important truth - When the money grows the money flows.
In 2007 it became a very different story. This is not to say banks and in particular private equity wouldn’t lend. With near zero interest rates anyone with a bit of courage and a bold promise of stella returns could borrow eye watering sums on questionable investment opportunities. Many of our clients did…some even survived to pay it back.
As interest rates have risen and the possibility of quick or easy returns has diminished the money has stopped flowing. As a result the economy has also stopped growing.
The problem is the economy won’t easily grow if no one is willing to lend! We are discovering that the great money tree must be watered as well as plucked. We seem stuck.
We are faced with a choice. Either we are faithful in the small things and slowly build back confidence through baby steps or the grown ups take a longer term view and act with the foresight of grown ups.
In my first article I mentioned the importance of patient capital to the economy. In this article I want to take a deeper look at this essential leg of a healthy economy.
A friend recently mentioned a lovely phrase his farmer father used to regularly repeat - ‘old men plant trees, young men cut them down’. What is this wise farmer getting at? Put simply, old men have acquired wisdom over time and wise people have learnt that good and ultimately valuable things come to those who wait. In other words those who invest for the longer term. Sadly we live in an age of eternal youth.
Let’s take this tree analogy a little further. It takes 200 years to grow an oak tree. Apparently Lord Nelson had trees planted for the future repairs of the Victory and when, a few hundred years later the great ship needed repairs it was one such tree that provided the oak they needed. Wonderful foresight by the wise old man. The problem today is we would rather cut down the trees, make logs and fashion them into lumber for a quick buck. If we did consider planting a tree to replace it we would probably pop in a pine and see if we could cash in again in a decade or two. The point being we would be planting a tree that we could ourselves harvest and profit from. It’s a rare investor who invests their own money now for their great grandchildren’s benefit. Very few people, institutions and even governments seem to look much beyond their own immediate gratification.
It is this deeply short term thinking, ultimately deeply selfish thinking, that is making us all poorer. The status quo is predominantly impatient capital. It is making us all poorer.
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Oak trees may take a long time to grow, more than our lifetime, but they are of great value. Pine trees are not. A nation of pine growers is a poor nation. It is of note however that a mature oak tree, left to grow, will grow more new wood each year than a mature pine, considerably more. This means that throughout the investment life of an oak it is delivering bigger returns than the pines. It’s just not liquid yet.
The challenge is to imagine how those who plant oaks can leverage that investment without cutting down the tree. The clever investment is one that delivers value while it grows. Patient capital doesn’t always mean deferred returns. The best investments deliver value both today and long into the future.
Where then are these patient investments that deliver both in the future and today?
In the book of Proverbs there is a short but insightful account of a woman of noble character who ‘considers a field and buys it’. She then goes on to use her savings to plant a vineyard. The interesting thing about a vineyard is that it takes 8 years before it bears any fruit that can be turned into wine and ultimately revenue. The good news is that this small example of patient capital will keep on giving for generations to come without ever depreciating in value. The land was a good investment but it delivered no returns without the planting of a vineyard. These investments combined delivered value both today and for the future.
How might this be applied? At Snug Architects we designed a multi award winning project that illustrates this kind of investment philosophy well. It’s the Milford-on-sea beach huts. The project is an inhabited sea defence. Over the long term it will defend Milford from rising sea levels and the effects of climate change. From day one however it has been generating revenue for the council and enjoyment for the beach hut owners as 119 beach huts. We also integrated a new public promenade on the roof. The result is an investment that delivers long term value that will last whilst also delivering both social and economic returns on that investment from day one.? The short term uses do not compromise the longer term investment. In many ways they are symbiotic, the beach hut owners being motivated too maintain the sea facing side of the sea wall. If properly cared for this project will continue to deliver value for generations to come. The council invested patient capital in a sea defence. They used their wisdom to integrate some beach huts.? This public private partnership is a great example of creative patient capital.
The problem I have been seeking to highlight in this article is the threat to our collective prosperity from impatient capital. The answer is not just patient capital. It’s creative patient capital we need….we need thoughtful long term strategic investments that unlock the shorter term interests of private capital. The two are not necessarily mutually exclusive. When we symbiotically align the interests of short term investors with longer term investment goals, the money can go where the money will grow both now and into the future. This will help to leverage state investment as both the measure to deliver much needed infrastructure whilst also simultaneously unlocking the supply of private investment. Patient and impatient capital working together for the common good.
In this series of three short articles on our failing economy and how to fix it I have identified three simple solutions that our Government can take to reverse the fortunes of Britain's failing economy:
Together, I believe these simple changes in focus will transform our collective prosperity as a nation.
Please join the debate and add your comments below.
Find out more about Milford-On-Sea Beach Huts - https://snugarchitects.co.uk/our-work/milford-on-sea-beach-huts