Four Keys to Attracting Long-Term Investors: Insights from an Investment Veteran

As business leaders and strategists, it's our job to increase the long-term value of our companies. To do so effectively, it helps to understand what experienced investors are looking for when assessing an organization's attractiveness and future success potential.

That's why I invited Ralph Birchmeier, an investment veteran with decades of experience analyzing and investing in companies, to discuss his insights on the Outthinkers Podcast. Ralph recently published a book, Reasons to Pass: A Guide to Making Fewer and Better Investments, to share his knowledge on the criteria investors use to evaluate companies.

In the episode, Ralph highlighted four key areas that business leaders should focus on to attract the types of long-term, patient capital every company needs:

1. Corporate Governance: This starts with having a strong, independent board of directors with diverse skills and expertise in industry, geography, accounting, and regulation. Equally important is getting executive compensation right by emphasizing restricted stock over stock options, incentivizing long-term decision-making.

"Companies need excellent corporate governance to protect the shareholders, and it begins with the board."

2. Asset-Liability Mismatch: Complete sensitivity tests to uncover any mismatches between asset lives and liability durations. Currency mismatches are common risks if an organization chooses to invest in lower interest debt. The collapse of WeWork is a prime example of what can go wrong when short-term lease liabilities are funded by long-term capital.

"Operational mismatches can happen all over the place for corporations. The larger they are, the more complex they are, the more geographies they're in, the more risk of mismatches."

3. Valuation: Valuations are always likely to be volatile. Keep valuations tethered to intrinsic business value and clearly communicate expectations to investors rather than getting caught up in daily stock price gyrations.

"Valuation is at the whims of the market, and most of the time it's reasonably well-tethered. Sometimes it's not, and I think that's really the opportunity for investors. For corporates, I think the goal of valuation should be: Don't let it get too crazy high, don't let it get too crazy low. I think Buffet's got it right and I think the CEO and CFO should definitely not feel that it's their obligation to go out there and raise the stock price."

4. Financial Leverage: Use free cash flow instead of excessive leverage to fund growth. Disciplined capital allocation and keeping leverage low entering economic downturns are key.

"The best businesses are relatively lower-leverage. And the reason is that they have stronger than average free cash flow and can generate higher than average returns on equity and incremental returns on equity with lower leverage."

Ralph emphasized that managing a company to create lasting value requires humility and constantly challenging assumptions. Strategists that get the governance, incentives, communication and discipline right in these areas will go a long way toward building an organization that investors are excited to partner with for the long-term.

Listen to the full episode.