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The Need For New Capital Agenda

10 February, 2010
Capital matters more today than ever before. Whatever your view on the recovery, uncertainty is the only certainty there is. Those who have the organisational flexibility to adapt and respond as the market changes will be able to exploit opportunities — those who don’t will miss them and weaken their competitive position.
 
The “new normal” of continuing uncertainty, weaker demand, margin erosion, scarcity of capital and increased risk aversion in strategic decision-making has narrowed the margins for error in capital allocation. Many companies feel inclined to hoard cash and be reactive, but winning companies will avoid the temptation for inertia, and use their capital to seize opportunities.
Findings from our inaugural Capital confidence barometer reveal a resounding sense that the business landscape has changed in fundamental ways that create both risk and opportunity. It also reveals an emerging polarisation of businesses into those gearing
up to capitalise on acquisition growth opportunities and those that feel constrained, stifled and unprepared in their ability to do so.
 
The barometer indicates that the next 12 months will see the rise of a few winners in each industry — those who adapt their capital agenda to better manage uncertainty and exploit opportunity.
Leading businesses are adopting a range of disciplines in five key areas to build competitive advantage:-
 
1. Preserving capital — Reshaping the operational and capital base to reflect the risks and realities of a prolonged downturn. Simplify, align and adapt the capital structure and balance sheet to prolonged economic stress. Implement wider risk monitoring methods to extend across critical value chains.
 
2. Optimising capital — Driving cash and working capital, and managing the portfolio of core and non-core assets to accelerate return on capital. Simplify and reset metrics around cash, working capital and return on invested capital (ROIC). Implement systematic capital allocation and portfolio reviews. Accelerate synergy release from acquisitions.
 
3. Raising capital — Assessing future capital requirements and determining how funding sources can be diversified to increase optionality. Diversify funding sources, and maturities to build resilience and optionality, and to establish a trust premium as an acquirer. Exploit opportunities to refinance debt or raise equity while liquidity and pricing are favourable. Proactively manage a pipeline of non-core assets for divestment and establish a heightened state of readiness to divest
 
4. Investing capital — Strengthening investment appraisal and execution methods so that opportunities can be realised while managing increased risk. More focused due diligence targeted at recession resilience. Ongoing proactive screening of distressed targets and governance tailored for accelerated acquisition. Exploit joint venture (JV), strategic alliance and alternative deal structures to more effectively manage scarce capital and increased risk.
 
5. Enabling the capital agenda — Upgrading planning, forecasting, performance reporting and governance processes to sharpen decision-making speed and effectiveness.  Implement short-term cash and working capital planning that enables early warning and intervention. Upgrade strategic decision-making tools and capabilities to enable speed.
 
This may feel like a “back-to-basics” approach and in many ways it is — these are good financial management disciplines after all.
 
However in less challenging times they have been allowed, in many businesses, to slip.
Our barometer indicates that while most companies are focused on at least part of this agenda, many are finding limitations in their systems, processes and capabilities that prevent them from managing the agenda with the rigor and foresight demanded by
the new environment.
 
We believe those who develop their capabilities to master this agenda will build competitive advantage by:-
• Increasing and maintaining investor confidence,
• Winning the competition for scarce capital,
• Anticipating and adapting to market conditions as they change, and,
• Seizing acquisition and other growth opportunities that others
are unable to.
 
Those who fail to implement a more rigorous approach increase their vulnerability as others in their industry move ahead.
 
A strong capital agenda now needs to be at the heart of all strategic decisions in the boardroom. Should you embark on an operational restructuring? Should you divest? Should you acquire opportunistically? Different options will suit different needs but one thing is clear — doing nothing and trying to ride out the storm is not a strategy for success.

 


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The Need For New Capital Agenda

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