A vigorous debate has emerged among companies and investors about the importance of long-term corporate thinking. In the current era of the 24-hour news cycle, focusing on the long term can seem like a novelty. And yet many corporate executives and investors have begun emphasizing the benefits of looking beyond the upcoming quarterly or annual financials. However, not everyone agrees that longer-term thinking is a worthy priority, and some disagree about the length of time worth prioritizing.
Mergermarket on behalf of Toppan Merrill spoke with four experts to explore the most important factors influencing long-termism in the current environment.
Toppan Merrill question: Many popular modern forms of investment – such as private equity, venture capital, and activist hedge funds – inherently focus on short- term gains at their investment targets. But few dispute the idea that these types of investors produce meaningful economic growth. Is it possible that defining long-termism strictly within the context of individual companies is not ideal for encouraging economically beneficial enterprise? Leading industry experts weigh in...
Charles Nathan, Finsbury says: I would stress that “long-termism” and “short-termism” are relative terms, and they need to be put into context. For instance, activist investors will tell you they're in an investment for three to five years, and they will say that's “long term.” A lot of people will say, "Anybody who sees past five years is pretty good. Not many people see that far." Five years is not a stupid timeframe for an investment, nor is it a stupid timeframe to own a stock.
I think one of the things that is missed when using these labels is what I would argue is value creation, which is what I would call the real, essential, underlying issue. Value creation has a time function built into it. If you create a dollar in 12 months or $2 in 10 years, which is better value creation? It's clearly the $1 in 12 months because of the time value of money.
Long-term investing or long-term planning presumes an honest attempt to discount your predicted outcomes back to the current value. Unless you think in terms of net present value, it's very hard to measure what the real long-term or short- term value is. It's clearly true that long term isn't always good. So I don’t think there's anything inherently good or bad about long term or short term. It should be about value creation on some scale and your ability to predict and plan.
Timothy Coffin, Breckinridge Capital Advisors adds: This really depends on your definition of meaningful economic growth. If short term gains come at the expense of creating any shared value, it’s hard to see how there’s meaningful long-term economic benefit. The very notion of sustainability or sustainable investing is to protect future value. That’s a very financially conservative principle. Looking through the lens of a bond investor, encouraging individual companies to focus and report on long- term sustainability factors is entirely consistent with rigorous research, and a prudent fiduciary principle.
Andy Green, Center for American Progress weighs in: I think it's not correct to say that all hedge funds, or all private equity firms, are the same. There are some that create a lot of value, that really do build companies or bring good ideas to improving company performance, and do hold management accountable – and then there are some that do the opposite, and a lot in the middle.
Creative destruction is part of capitalism. We want to have creative destruction – we want to have accountability and checks on power. It's fundamental to why capitalism is about economic freedom and political freedom, quite frankly. And there are times when executives and management need to be held accountable to investors, to not see their money wasted on bad investments and bad ideas. But there are also times and places where executives need the freedom not to be harassed by activist investors who just want to take money out for the short term.
Sarah Williamson, FCLTGlobal says: Private equity, venture capital funds, and activist investors all have the advantage of being active owners. They engage, frequently and strategically, with the companies they invest in, which can create value and economic growth. The challenge is that some investors can invest with a long-term J-curve – tolerating the possibility of an initial loss for the sake of a longer-term gain. However, those with short-term time horizons cannot afford to wait, and so choose not to invest their assets in that way. This leads to companies feeling pressured to “bring earnings forward,” potentially leaving nothing for the future. Ideally an economy, or a portfolio, is comprised of companies with different time frames and less vintage risk – that’s the advantage of a broadly diversified portfolio.