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How your company can optimize capital and carve a path toward growth
March 11, 2021
As the uncertainties of the pandemic weigh on the US economy, corporate balance sheets are generally stronger than they were prior to the crisis — though some remain vulnerable. Looking ahead, companies evaluating their finances and investments will continue making tough decisions as the pandemic persists. Choices will hinge on several factors, but companies with outsized access to capital and wide-ranging borrowing options will be in the strongest position to enhance value and carve a solid path toward growth.
The challenges ahead will be complex, however. Companies should make the most efficient use of their capital at a time when valuations have soared to record highs, making it harder to find good deals. But before getting to that, let’s start by acknowledging that not all companies are created equal. Some with limited access to capital should continue to preserve cash and strengthen their balance sheets. Because liquidity is a priority during times of uncertainty, it will be critical for these companies to watch for two significant challenges:
- Trapped cash. How capital is moved and repatriated around the world is already complex due to accounting, tax and regulatory issues that arise. With disruptions in supply chains brought about by the COVID-19 crisis, moving cash has become more difficult. Some corporations are even considering alternatives like bitcoin as a reserve currency. It will take time for the market to adjust.
- Suppliers’ credit insurance. These policies are often overlooked, but they cover the risk of nonpayment for supplies. Because the credit insurance market has remained volatile, many companies run the risk of having to pay cash on delivery, which could erode their ability to manage working capital and preserve cash.
Reassess your capital structure
Those with more access to capital are in a different position. With US interest rates historically low, companies should be strategic. Refinance your debts to drive down borrowing costs. Return the value to shareholders.
Most companies should also reassess the mix of debt and equity they use to finance operations and overall growth. Many of today’s companies are operating with more efficient capital structures than ever, following lessons from the 2008 global financial crisis. And they’ll continue to have more alternative sources of capital than ever. Here are three sources you might consider:
- The corporate debt boom. Companies have sold record amounts of bonds to investors, sending US corporate debt to a record of more than $10 trillion. This decades-long boom will likely continue for some time, as record-low US interest rates will continue to drive companies to borrow.
- The rise of SPACs. First created in the 1990s, special purpose acquisition companies (SPACs) have only recently taken off. In 2020, SPACs raised a record $67 billion — more than traditional IPOs by volume. As more private companies search for novel ways to raise capital through the public markets, the surge in demand for so-called “blank check companies” will likely extend throughout 2021 and beyond.
- The PE market’s pool of dry powder. The pandemic created a unique situation for corporations by disrupting critical aspects of business, including supply chains, consumer behavior and business models. Companies that want to fundamentally transform their business can look to private equity firms, which currently hold a record $1.4 trillion in cash reserves.
Now is the time to optimize your resources
Your company may have cash to ride out of this cycle, but the tricky part will be making the optimal use of your capital. With rates so low, capital is chasing yield and corporations, in turn, are chasing returns. You’ll want to manage your capital efficiently, but how should your company’s leaders decide where to invest?
For starters, make sure you’re being objective. Segment your portfolio to determine which assets add value to the overall business and which do not. Figure out what your company does best and ask yourself:
- How and where can I expand the business?
- How can I grow my company’s customer base?
- How can I increase revenue?
- How can I return value to shareholders?
Investments in technology will be key, as the crisis has reminded us that cloud computing, artificial intelligence and other technologies can accelerate the transformation of businesses and the workforce. More than that, new and emerging tech can expedite digital modernization of key business functions, including supply chains and finance departments.
The bottom line: Capital is widely available. Now it’s time to strategically manage the resources you have and rethink your company’s future.
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