Private Equity Tip: Look at Management's Ability to Allocate Capital

Capital Allocation

Capital allocation is a simple concept in theory, but hard in practice. It is what projects or operations the management team directs available funds to, and how much of those funds go there.

 

Private Equity Tip

Private companies have several options for their allocation of capital. These include:

• Investing in New Projects - When companies have capital available, they may try to invest in new projects. These projects can be organic, like investing in new manufacturing equipment, or inorganic, such as mergers and acquisitions. Regardless of the type of project, the goal is to grow revenue and cut costs
• Other Uses of Capital - Other uses of capital include paying down debt and paying out dividends