Management SummaryStern Stewart Research // Volume 59
The low interest rates and excess liquidity in the market have reached unprecedented levels. Institutional investors are desperately searching for alternative investments. At the same time, several industries face a significant need for investment but operate at a relatively high cost of capital. A considerable spread has emerged between the return expectations of institutional investors and the cost of capital of these companies. Against this background, many companies are beginning to question the necessity of asset ownership in their portfolios: „Am I the best owner in the market? Is ownership one of my strategic core competencies? Is it necessary for my business model at all?“ Capital Light strategies enable companies to free up capital and exploit this spread. They can strategically reinvest the released capital and apply their core competencies to a larger asset portfolio – without having to finance more ownership. The four principles for realizing a Capital Light strategy are:
1. Obtain clarity on the best ownership throughout the life cycle: What investments are best suited for a partial sale or participation model? In what phases of the life cycle can ownership be transferred? How strong is the investor appetite? 2. Do not leave the liabilities side of the balance sheet to the banks: Which standardized transaction and participation models are suitable? 3. Optimize the capital and risk positions in the Capital Light business model: How does the service model work after the partial sale? How are the risk transfer and the long-term capacity utilization concept structured? 4. Abandon traditional ways of thinking: Does the business still think in terms of ownership and the protection of vested interests? And is the finance function limited to traditional M&A? How can old habits be done away with and a tangible paradigm shift initiated?
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