Firm of the Future: Capital Gets a Reset

Capital today is ubiquitous and cheap, leading companies to shift their strategies toward other factors, like talent or management bandwidth. David Harding, an advisory partner in Bain's M&A and Corporate Finance practices, discusses the impact of the low cost of capital on investing, and how investors can generate growth and fuel returns in this environment.

Read the Bain Brief: The Firm of the Future

Read the transcript below.

DAVID HARDING: An entire generation of executives grew up in an environment where the acquisition and allocation of capital was the essence of strategy. Tools like the capital asset pricing model were used to bring sophistication to the questions of where to play and how to win. Today, capital is ubiquitous and cheap. Any company that is reasonably profitable or even a good idea will have plenty of money to support whatever it is the executive team wants to do.

This suggests that in the future, strategy is going to be less about capital and more about other things. For example, talent or management bandwidth. One mathematical result of the low cost of capital is that the value of growth goes up.

Think about an annuity. As the discount rate approaches zero, the net present value of that annuity grows exponentially. In a world where investors are hunting and searching for returns, the value of growth becomes paramount. And they're going to be putting more and more pressure on organizations to find a way to grow.

Sadly, many companies historically have not been good at making growth investments. One way that this may actually play out is that companies will take after nature and plant many, many seeds; see which ones grow; fertilize and cultivate the ones that do; and then call the rest. This suggests very different ways in terms of managing companies; it also suggests very different capital structures as we go forward. We're starting to see hybrid and amorphous merging of different pools of capital today. For example, private capital is taking investments in public companies through hedge funds, activist investors or private equity.

Private equity firms, in turn, are lengthening their holding periods to gain the full value of the growth investments that they make. We're also seeing the potential for more minority investments, different joint ventures, partnerships. And finally, we're seeing the government starting to approach private capital to fund things like infrastructure. What all this suggests is that we're going to see many, many different ways of combining capital in order to support growth investing. And that investors will continue to find innovative ways to seek higher and higher returns.

Read the Bain Brief: The Firm of the Future