This year, patient capital has been garnering increasing attention.

The so-called "patient capital" refers to a form of capital that focuses on long-term investment and emphasizes stable returns. It differs from traditional short-term speculative capital, as it pays more attention to the long-term development potential and value creation ability of enterprises. So, what does patient capital mean for the current capital market? And what profound impact will it have on the A-share market? How can we further cultivate and strengthen patient capital? On this matter, the Securities Times reporter interviewed Liu Qingshan, Chairman of Beijing Qinghe Spring Capital Management Co., Ltd. (hereinafter referred to as "Qinghe Spring"), a leading domestic private equity institution.

Investment should be based on the long term

Securities Times reporter: As an investor, why should you pay attention to patient capital with a "long-termism" approach?

Qinghe Spring: First, looking at it from a macro perspective, the long-term investment return rate of stocks is the highest. Although the history of A-shares is not long, and short-term fluctuations are relatively large, as an emerging market with significant development potential, the overall annualized return rate of A-shares over the past 19 years is about 9.6%, which is much higher than the 4.3% of long-term government bonds, the 2.5% of short-term government bonds, and the 2.3% of inflation.

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The history of the U.S. stock market is longer, from 1926 to 2023, the overall annualized return rate of the U.S. stock market reached 10.3%, also higher than the 5.1% of long-term U.S. government bonds, the 3.3% of short-term government bonds, and the 2.9% of inflation. The main reasons behind this are, first, although short-term macroeconomics are complex and changeable, society and the economy are always moving forward in the long term; second, enterprises are the main creators of social wealth and the main drivers of productivity improvement. In the long run, listed companies can achieve a return rate higher than the average return rate of society.

From a meso perspective, the long-term returns of investors are more in line with the shareholder returns and profit growth of enterprises. From 2005 to 2023, the annualized return of A-shares is about 9.6%, which matches the average ROE (Return on Equity) level of the whole A-shares at about 10.5%, and the compound growth rate of EPS (Earnings Per Share) is about 6.5%. Therefore, the longer the investment period, the more the power of enterprise profit growth dominates, and the role of valuation is clearly declining. Therefore, long-term investors do not pay much attention to short-term market sentiment and stock price fluctuations.

From a micro perspective, the intrinsic value of an enterprise depends on the discount of long-term free cash flow. In our research and investment process, the core is the analysis of the long-term competitiveness of enterprises and the judgment of growth potential, and short-term performance games are not so important.

Cultivating patient capital has far-reaching significance

Qinghe Spring: "Patient capital" has multiple meanings, involving strategic resource allocation, economic structure transformation, and capital market reform, among other aspects. For A-share investment, we believe that in the long term, it is expected to gradually release multiple benefits.Firstly, from a molecular perspective, the sustained development of patient capital will, in the long term, be conducive to stabilizing the profit cycle of the A-share market. The growth of patient capital and the development of new quality productive forces are complementary, essentially constructing a new model for development and accelerating the improvement of China's total factor productivity. In the past, under the dominance of the financial cycle, the profit cycle of A-shares fluctuated significantly, but in the future, as the innovation cycle gradually emerges, the profitability stability of A-shares is expected to be systematically enhanced, and more high-quality and competitive listed companies will emerge.

Secondly, from a denominator perspective, patient capital is expected to extend the holding period of A-shares, which will be beneficial in reducing the market's risk premium in the long term. Due to the high inherent volatility over the long term, the implied risk premium level of A-shares has been relatively high, which is not conducive to the valuation enhancement and stability of A-shares. In the future, as patient capital continues to increase, it will bring about positive changes. On the one hand, assets that meet the preferences and stock selection criteria of long-term capital are expected to enjoy the dividends first; on the other hand, the overall risk premium of the market is also expected to gradually decline, thus providing certain support for the overall market valuation.

Qinghe Spring: Firstly, increase the equity investment efforts of pension funds. The current institutional share in the A-share market is less than 20%, and the development of long-term capital is still immature, with a significant gap compared to overseas developed markets. Taking the US stock market as an example, the current institutional share is close to 60%. Referring to the experience of the US stock market, the period of the fastest increase in institutional share was around the 1980s, rapidly increasing from 20% in 1970 to 63% in 2000. The main driving force during this period was the active entry of US pension funds into the market. From a policy perspective, the United States introduced IRA and 401K accounts to vigorously promote the development of US pension funds through tax deferral benefits. In terms of operation, US pension funds are highly market-oriented, with managers aiming for long-term investment, low fees, and a simple model. Specifically for the domestic market, it is suggested that China should also develop the second and third pillars of pension funds as soon as possible, while also improving the assessment and regulation of pension fund equity investments.

Secondly, enhance the inherent stability of the capital market. The A-share market has significant short-term fluctuations, which are obviously disturbed by macro factors and market sentiment, and the current infrastructure of the A-share market still needs to be improved. Due to relatively poor self-regulation capabilities, it is necessary to take measures to deal with market failures. On the one hand, this can effectively stabilize the market, and on the other hand, it can inject confidence into the market.

In summary, we believe that investment should start from the long term. In the future, we need to pay more attention to the long-term returns to shareholders, the long-term growth of profits, and the long-term creation of free cash flow. It is believed that with the continuous growth of patient capital, the vitality of the A-share market is expected to be re-released.