A Common Hurdle Rate for Diversified Holding Companies
When business units cannot be compared, capital goes to whoever argues best. A shared scoring framework changes that.
Why private groups lack a common threshold
A common hurdle rate lets unlike investments compete on the same terms. Listed companies and private-equity portfolios have one because shareholders or lenders insist, while a family-owned or founder-owned group can go for decades without it, since no covenant forces the comparison.
The gap stays hidden while the group is simple and shows once the units diverge. A mining-equipment expansion and a logistics upgrade have different payback periods and different risks, so each business case can be careful and still tell the owner nothing about which deserves the money.
What fills the gap
Where no standard exists, capital follows advocacy, and the unit leader with the closest relationship or the most polished deck tends to prevail. This is not a failing of the unit finance teams, who are doing sound work inside a group that never asked them to be comparable.
Three scores, one review
Exhibit 1: The three dimensions of a group scoring framework and the distortion each one removes.
| Dimension | Question it answers | Distortion it removes |
|---|---|---|
| Return against the hurdle rate | Does the proposal clear the group cost of capital? | Large proposals favored over efficient ones |
| Strategic fit | Does it match the unit's agreed role in the portfolio? | Cases built on a unit's own ambition |
| Risk exposure | How does the unit's operating and market risk change the return? | Unlike risk profiles treated as equal |
The scores matter less than the timing. If units are assessed one at a time over successive cycles, each is still judged alone, and the comparison only appears when all of them are scored together.
In one composite engagement, a privately held group scored its four units together, and about a fifth of planned capex moved from the weakest unit to the two strongest. See the capital allocation case study.
The conversation it forces
A first concurrent review usually exposes a long-running dispute, often about a low-margin unit kept for diversification. The framework does not end that dispute, but it does give the owners a shared basis for deciding it.
Owners should expect this and plan time for it, since a framework that surfaces nothing uncomfortable has probably been calibrated to protect the status quo. Once the first cycle is complete, hold the review on the same date each year so that every request is judged against the whole portfolio.
This article covers the standing framework. For capex under commodity price uncertainty, see scenario planning for capital allocation, and for the public-sector version, see capital prioritization for infrastructure authorities.
Key takeaways
- Set one cost-of-capital threshold for the group and publish it to every unit leader.
- Write down the role each unit plays in the portfolio before any proposal is scored.
- Schedule a single review in which all units present against the same criteria.
- Fix the review to a calendar date so it does not follow the timing of individual requests.
Compare your units on one basis
We can help you set a group hurdle rate and run a first portfolio review across every business unit.
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