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Systemic Transformation Requires Long-Term Investment Strategies

Systemic Transformation Requires Long-Term Investment Strategies
 Milo Rignell
Fellow - AI & Emerging Technologies

The European Union and its member states have set themselves ambitious agendas for digital and environmental transformation. The impressive recovery and investment plans announced by various countries in the wake of the Covid-19 crisis, however, will not be enough to meet the challenges of the future. Europe will also need to rely on significant private investments, aligned with long-term incentives.
Institut Montaigne and the School of Management and Innovation at Sciences Po have organized a series of events on the future of investment in Europe to address these issues. This article is the seventh and last one of the series around long-term investing with Delphine d’Amarzit, CEO of Euronext Paris, Thierry Déau, Founding Partner and CEO of Meridiam, Christian Sinding, Managing Partner and CEO of EQT Partners, and Natacha Valla, economist and dean of the School of Management and Innovation at Sciences Po.

In order to credibly be purpose-driven, investments must have a long-term perspective and an ambition to contribute positively to the challenges the world is facing. Long-term investments align monetary value creation with lasting, underlying value creation. In other words, to improve the asset’s value over the ownership period, investors must actively improve and develop the asset for it to increase in value, rather than relying on passive speculation. They also encourage investors to better protect their assets while they are being held, for instance from unlikely or unexpected events, which also includes investing in better risk management. Finally, by setting and supporting long-term goals, sometimes even over 20 or 30 years, long-term investments are far more likely than short-term strategies to be both ambitious and more closely correlated with socially and environmentally positive outcomes. 

Private and public markets both offer opportunities for systemic transformation

Private equity’s typical investment horizon, often 5 years or more, and governance model, with significant control over the company, provides it with many of the necessary tools to drive innovation and transformative change. Firstly, when selecting a company, a private equity firm will more naturally be attracted by companies that present an opportunity for improvement and that align with long-term societal trends. Indeed, at the end of the ownership period, the investment must be liquid, which may not be the case, for instance, of many ‘brown’ or socially-questionable assets.

This investment strategy, focused on transformative change and value creation, increasingly dominates the past "corporate raid" strategies.

Over the course of the investment period, considerable resources will then be deployed to develop the company, including through digitization, optimizing resource consumption, and also on environmental, social, and corporate governance (ESG), including reducing its environmental footprint. This investment strategy, focused on transformative change and value creation, increasingly dominates the past "corporate raid" strategies that featured hostile takeovers of a company, perceived asset stripping, major layoffs or other significant corporate restructuring activities, and from which some private equity firms inherit a negative reputation. 

Public markets can also provide important advantages and strong incentives in support of a company’s long-term strategy. Going public increases a company’s transparency, visibility and legitimacy to a larger set of stakeholders, and opens access to a much larger capital pool to fund the investments that can fuel a company’s growth. Going public can in some cases provide a company's management with greater independence, when a small number of private investors' incentives may not have been aligned, but it can also increase dependence on short-term share price.

However, over recent years, companies preparing for an Initial Public Offering (IPO), in particular those with less traditional economic development strategies, have increasingly been able to rely on longer term 'cornerstone' investors.

By committing to holding their shareholding for a significant time-period after the company's IPO, these 'cornerstone' investors protect the company’s long-term strategy from being destabilized by short-term share price fluctuations. Recent examples in France include Believe, HDF, Afyren and HRS. Finally, increased scrutiny and regulations in public markets, including non-financial reporting and ESG requirements, ultimately hold public companies to higher levels of transparency and accountability to all stakeholders, albeit sometimes at the expense of flexibility.

Companies are able to easily switch between private and public markets depending on which is better adapted to their strategy and stage of development.

Companies are able to easily switch between private and public markets depending on which is better adapted to their strategy and stage of development. Stock exchanges such as the NYSE have long given up actively discouraging public companies from delisting and going private, having quickly realized the resulting net negative impact on listings overall by discouraging companies from listing in the first place.

Whether in public or in private markets, sustainable long-term transformation requires a broad stakeholder buy-in. For this, transparency, open dialogue and collaboration between different stakeholders - governments, employees, customers, and companies - is key. Dialogue between public and private investors can also fluidify listing and delisting. These corporate governance practices have long been observed with positive results in certain Nordic countries such as Sweden, Finland and Norway, which benefit from high levels of trust in society, and should inspire others.

Do interest rates impact the long-term ? 

Interest rates are an important parameter in evaluating the long-term value of assets as well as the viability of investment decisions relying on high levels of debt. Although they may appear to question many investment opportunities, rising interest rates may not be as threatening as they seem. On the one hand, long-term investors focus on long-term rates, for instance over 25 year time periods, which are less prone to sudden changes or fluctuations. But on the other hand, focusing on underlying value creation, rather than on extracting value by selling assets or other "corporate raid" strategies, may to some extent reduce an investment strategy’s dependence on interest rates by offering more levers with which to generate high returns. 


Copyright : Daniel ROLAND / AFP

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