Introduction

Patient private capital is widely regarded as a critical ingredient for innovation, particularly as breakthroughs in biotechnology and deep technology require longer development cycles and a greater tolerance for uncertainty. This research investigates the origins of patience in venture capital (VC) by examining whether the presence of long-term limited partners (LPs) translates into more patient investment strategies and improved startup outcomes. The study addresses this question by utilising the Chinese VC market, which features significant variation in fund horizons and experienced a major deregulation in 2014.

Institutional background: the Chinese VC market and the 2014 deregulation

China’s VC market is the second-largest globally, characterised by a dual-currency structure. RMB-denominated funds are raised from domestic LPs, while USD funds are primarily raised from foreign investors. Prior to 2014, the RMB market was dominated by shorter-term investors, including wealthy individuals and local governments. In December 2014, a pivotal shift occurred when the China Insurance Regulatory Commission (CIRC) allowed insurance companies to allocate up to 2% of their assets to VC funds. This reform introduced a significant source of long-term capital to the RMB market, as insurance companies typically have long-duration liabilities and stable premium inflows.

Experimental evidence

The authors conducted a randomised survey experiment with 112 Chinese fund managers (GPs) to isolate the causal effect of LP composition on strategy. GPs were presented with hypothetical LP mixes and asked to formulate fund durations and project holding periods. The experiment revealed that GPs perceive insurers as the most patient LPs, with an average 8.3-year horizon, whereas wealthy individuals were viewed as the least patient, with an average horizon of 4.3 years. The results showed that a one-standard-deviation increase in perceived LP horizon (approximately 2.4 years) leads GPs to increase their chosen fund life by 0.48 years. This provides direct evidence that GPs actively tailor strategies to the perceived horizons of their investors.

Observational evidence

To examine real-world impacts, the researchers assembled a dataset from sources including Zero2IPO, Preqin, and TianYanCha, covering VC activity from 2005 to 2019. Using a difference-in-differences (DID) design, they compared RMB funds (the treated group) with USD funds managed by the same GP firm (the control group). Following the 2014 deregulation, the share of RMB funds with insurer LPs increased significantly. Within-GP analysis demonstrated that the likelihood of having an insurer LP increased by 17.4 percentage points after 2014, primarily displacing individual investors who represent the shortest-horizon capital.

Main findings

The influx of patient capital significantly altered fund investment strategies. Relative to USD funds, treated RMB funds increased their average holding period by 0.71 years (a 14% increase) and shifted strategy toward younger, earlier-stage companies. The share of early-stage deals (angel, seed, or Series A) increased by 10.5 percentage points. Importantly, these strategic shifts translated into improved real outcomes for portfolio companies. RMB funds experienced a 52% increase in the IPO/M&A rate of their portfolio companies and a doubling in the probability that these companies ranked in the top quintile for patenting. There was no corresponding increase in company failure, suggesting these improvements were not driven by excessive risk-taking.

Alternative interpretations and robustness checks

The findings remained robust across various tests, ruling out pure capital-supply effects. The researchers found no systematic increase in RMB fund size relative to USD funds after the reform, indicating the results were driven by the ‘color of money’ (investor composition) rather than just a bigger capital pool. The results also held when controlling for local financial market conditions, such as stock market returns and interest rates. An ‘intent-to-treat’ test, using a GP’s pre-2014 RMB fund share to predict post-reform currency choice, further confirmed the causal nature of the relationship.

Discussion on channels

The research identifies a strong treatment effect on existing GPs at the intensive margin, where managers adjust strategies in anticipation of, or response to, patient LP preferences. While composition effects (GP entry) and re-sorting (matching) may play roles, the survey experiment confirms that GPs strategically cater to the perceived horizons of their capital providers. The study also highlights that secondary market liquidity for LP stakes can dampen this effect, as a liquid market allows LPs to adjust their effective horizons without requiring GPs to alter fund strategies.

Conclusion

The study concludes that investor patience is a critical driver of VC strategy and innovation. The findings suggest that the identity of ultimate capital suppliers matters significantly for the real economy. Policymakers are encouraged to facilitate the entry of patient institutional investors, such as pension funds and insurers, to support long-term technological development. Conversely, the results offer a cautionary note regarding the ‘retailisation’ of private markets, as impatient capital may erode the ability of venture capitalists to back early-stage, high-uncertainty projects.