Investing In the Recovery

Guaranteed long-term equity would help companies and investors go long on America

April 3, 2020

Bleak news headlines have become one of the only consistent messages we have in these troubling days. The ones tallying the health effects of the coronavirus are heartbreaking. We owe the greatest respect and thanks to the people working to preserve life through science, medicine, logistics, and sheer compassion.

The headlines announcing economic damage are also frightening. In just the last two weeks, nearly 10 million people have filed for unemployment, shattering previous statistics. Restaurants and retail businesses have shuttered. We know a recession is coming, though no one can predict its severity or length.

And while $2 trillion of government relief programs will help, they’re not nearly sufficient to keep the economy afloat, let alone help us rebound once the crisis has passed. We need something more. Thinking about recovery and growth right now may feel like thinking about spring blooms just as the first frost of winter is covering the foliage. But now is precisely the right time to do it. If we want to see those blooms when the crisis has passed, we need businesses to plant enough seeds now.

Companies in a position of strength need to invest and innovate; they are the ones that will lead us out of the current downturn. Even in these challenging times, they’ll develop new breakthroughs and pursue strategic acquisitions that will transform the market and help the economy emerge stronger. To do that, they will need funding.

But the traditional capital markets, driven by short-term pressures, are not built for this moment. While a long-term approach is beneficial in any market environment, its importance is only magnified by the gravity of the current crisis. Leaning into a downturn requires long-term thinking supported by true long-term investors, who are not concerned by daily market swings. For these investors, with a time horizon measured in decades and generations, now is the time to step to the fore.

Both companies and investors need corporate funding structures that are fit for purpose — enabling rapid access to capital and encouraging long-term horizons. Here are two proposals that can be implemented immediately to help achieve both of these goals:

Guaranteed long-term equity investments. As companies look to tap the equity markets, the status quo approaches will leave them with the same troublesome short-term pressures. Instead, I propose a new long-term partnership between companies and investors: guaranteed long-term equity (GLE). While the exact securities could range from straight common stock to a variety of convertible instruments, the parameters of GLE investments would be the same. Investors would be required to hold the shares for a minimum period of five years — or even 10 years — giving companies the ability to invest and innovate without being pressured to cut headcount in order to boost their stock price. (Toyota, a leader in long-termism, took a similar approach when it issued common stock with a five-year lockup in 2015.)

In return, GLE investors would get to buy this new issuance at an attractive discount to the market price. In addition, during the restricted holding period, the company would commit to suspending share buybacks and to ensuring its executive compensation is aligned to a long-term horizon.

LTSE was founded to enable this type of long-term approach to capitalism. In addition to building the first stock exchange with that explicit mission, we’ve developed software tools to help facilitate innovations like GLE investments. Our dashboard can manage and track shareholder covenants, provide metrics for new issuances, offer a company visibility into its long-term shareholder base, and reveal investors’ true time horizons.

Broader access to automatic issuance mechanisms. To issue one of these guaranteed long-term investments, many companies would have to go through a lengthy registration process. In addition to taking anywhere from two to six weeks — which can be a costly delay in times like these — this process might signal to the markets that a company intends to issue securities, giving traders an opportunity to make mischief in their stock.

Recognizing these dynamics, the Securities and Exchange Commission allows certain large companies to raise registered capital quickly, and with minimal administrative requirements, under provisions for Well-Known Seasoned Issuers (WKSI). A company with WKSI status can raise money with immediate effect. But this opportunity only exists for companies that have more than $700 million of outstanding shares in the hands of public investors, or that have issued $1 billion in debt over the past three years.

Given the pressing needs throughout our economy, the SEC should lower the WKSI threshold to permit all companies in good standing with more than $250 million in public float to use this provision. A thoughtful expansion of capital access measures will help more companies use innovative new structures like GLEs and reach committed long-term investors who want to partner in rebuilding the economy.

I’ve been talking about long-termism in the capital markets for nearly a decade. When I started, some people were enthusiastic, some were curious but questioning, and some wondered aloud why any change was necessary. One thing I heard a lot was, “If it ain’t broke…”

Now, it’s apparent how broken our system has been. The obsession with short-term gains, the prioritization of financial expediency, and the neglect of key stakeholders have all exacerbated our current crisis.

We need to build and invest in a financial ecosystem that will help us recover from this crisis, and also help us be more resilient in the face of the next one. Now is the time to go long on America.