Capital discipline when the cost of capital moves against you
Underwriting standards matter most in the years when they are least convenient. Notes from the investment committee.
S. Achebe
Managing Director, Capital & Investments
Every investment committee claims discipline. The claim is only testable in the years when discipline is expensive — when the cost of capital has moved against you, deal flow has thinned, and the pressure to deploy is structural rather than opportunistic.
Our response has been to make the underwriting standard explicit and hard to move. Positions must clear a return threshold set against local currency cost of capital, not a dollar benchmark that flatters the analysis. Structures must survive a currency stress scenario that is drawn from actual historical movement rather than a modelled distribution. And every position must have an identified route to operational involvement from one of the group's divisions.
That last requirement is the one that removes the most deals from consideration, and it is the one we defend hardest. We are not a pure financial investor and we underperform when we behave like one. Our advantage is that a portfolio company can access contracted power, engineering capacity, real assets and distribution from within the group. Where we cannot supply that, we are simply another cheque, and we should expect another cheque's returns.
The consequence is a smaller book than our capital base would permit. We regard that as the correct outcome. Deployment pace is an input, not a result.