Building a Unified Capital Allocation Framework

Listed and private-equity-owned companies usually allocate capital against a common hurdle rate, because outside shareholders or lenders require it. A privately held group has no such pressure. This one had four business units, four planning processes and no shared threshold.

As the group diversified, capital requests stopped being comparable. A mining-equipment expansion and a logistics upgrade carry different risk and payback. Without a shared yardstick, decisions drifted toward relationships and the quality of the presentation.

We built a single framework that scores every proposal on three dimensions, then ran all four units through it in the same cycle. Scoring units one at a time would have let each be judged in isolation, which was the existing problem.

• →Roughly one-fifth of the capital expenditure planned for that cycle moved from the weakest-performing unit to the two strongest, on the basis of comparative scores.
• →Ownership now runs a portfolio review every year. It replaced the ad hoc cycle in which requests were judged as they arrived.
• →Every unit leader prepares future cases against identical criteria, which had not happened before this engagement.

The framework did not settle the argument about the lowest-margin unit. It gave the leaders a shared basis for settling it themselves, which is why the outcome held after we left.

Fixing the review to a calendar date mattered as well. The whole portfolio is now compared at once, whatever the timing of individual requests.