Seizing the Opportunities Created by Superabundant Capital

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Seizing the Opportunities Created by Superabundant Capital

For corporate leaders twenty-five years ago, capital was scarce and the cost of debt was high. The weighted average cost of capital hovered above 10 percent for much of the 1980s and ‘90s. In that environment, the best course of action was to avoid risky projects by using high hurdle rates.  Only the projects with the greatest potential return on investment received funding.

But today, capital is no longer scarce, and it is no longer expensive. In fact, research by Bain & Company’s Macro Trends Group estimates that the amount of financial capital increased nearly 300 percent, from $220 trillion in 1990 to $600 trillion in 2010, and it is now equivalent to 9.5 times glob- al GDP.1 Because capital is so abundant, it is also cheap.

For most corporations, the marginal cost of borrowing capital, after taxes, is about 3 percent. That’s roughly the same as the inflation rate, so in real terms, the cost to borrow capital is essentially zero. That means companies can easily access all the capital they need to launch new product lines, build new facilities, purchase new technology, and acquire competitors.

What caused this change? After the real estate market crashed and the economy collapsed in 2008, the U.S. Federal Reserve, as well as central banks in other developed economies, slashed interest rates to unprecedented lows in an attempt to spark growth. Instead, the economy has grown slowly, and rates have increased only slightly over the past decade.

Demographic forces are also driving the explosion of capital. Aging Baby Boomers have passed their peak spending years and are now in saving mode as they try to build up a nest egg for retirement. The billions of dollars they are pouring into savings accounts are providing banks with capital that can be lent to businesses.

This mountain of superabundant cheap capital is poised to drive the Deployment Phase of the Fifth Techno-Economic Revolution. Whether we’re talking about manufacturing and service robotics, ultra-high-speed networks, or infrastructure for emerging markets, they all require lots of capital. In the past, capital has been costly and technology has been expensive, making these projects infeasible...

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