Capital Strategy · Executive Perspective
Capital Allocation After the Rate Reset
Why stronger growth, persistent inflation and higher borrowing costs require privately held companies to re-underwrite every major use of cash.
01
Executive summary
The September 2026 policy shift changed the capital-allocation environment for privately held companies. On September 16, the Federal Reserve raised the federal funds target range by one-quarter percentage point to 3.75–4.00 percent. By September 25, the bank prime loan rate stood at 7.00 percent. For owners using floating-rate credit, acquisition financing or working-capital facilities, the cost of waiting for easier money is no longer a sound operating assumption.
The underlying economy is not signaling broad contraction. The Federal Reserve described activity as expanding at a solid pace, while the Bureau of Economic Analysis reported that real final sales to private domestic purchasers grew at a 4.2 percent annualized rate in the second quarter. The challenge is therefore not simply defensive. Leaders must fund growth in an economy that can still produce opportunity while charging a higher price for capital and maintaining elevated inflation risk.
02
The hurdle rate has moved
A project approved under a lower borrowing-cost assumption may no longer produce the same economic return. The Federal Reserve's September projections placed the median 2026 federal funds rate at 4.1 percent, PCE inflation at 3.7 percent and real GDP growth at 2.3 percent. Those projections are not guarantees, but they make one management implication clear: capital plans should not depend on an immediate return to unusually inexpensive financing.
Privately held companies should recalculate expected cash yield, payback period, debt-service coverage and downside liquidity for every material commitment. The relevant comparison is no longer project return versus zero. It is project return versus the full cost of funding, the value of preserving liquidity and the return available from competing uses of capital.
03
Growth does not eliminate financing risk
Recent data contain both opportunity and constraint. BEA estimated second-quarter real GDP growth at a 1.5 percent annualized rate, real gross domestic income growth at 2.2 percent and a $400.9 billion increase in profits from current production. BLS reported that nonfarm business productivity rose at a 1.4 percent annualized rate in the second quarter and 2.2 percent from a year earlier.
At the same time, credit conditions remain differentiated. The Federal Reserve's July lending survey found that standards for commercial and industrial loans were broadly unchanged and easier than historical midpoints for several borrower groups, but standards remained relatively tight in commercial real estate, very small business and nonbank-financial channels. Access to credit may exist without making every financing structure attractive.
King Global's analysis is that this combination rewards selective investment rather than blanket retrenchment. Companies with strong cash conversion, credible operating data and clearly underwritten projects can still invest. Companies relying on optimistic revenue ramps, refinancing assumptions or thin covenant headroom should reset the plan before capital is committed.
04
Re-underwrite the five major uses of capital
Every dollar should be assigned against a common decision standard. Management teams should compare strategic value, risk-adjusted return, cash timing, reversibility and required operating capacity across the complete portfolio—not evaluate each request in isolation.
- Liquidity and resilience: protect payroll, taxes, debt service, essential inventory and operating continuity under a defined downside case.
- Core productivity: prioritize process, technology and capability investments with a measurable effect on throughput, quality, unit cost or cash conversion.
- Organic growth: fund demand generation, capacity and market expansion only when the company can identify the constraint being removed and the evidence required to continue.
- Acquisitions: test valuation, financing structure, integration cost and covenant headroom against slower revenue, delayed synergies and higher-for-longer rates.
- Owner distributions and noncore projects: treat them as explicit capital-allocation decisions after operating resilience and higher-return strategic uses have been assessed.
05
Design the capital stack for duration and downside
Funding structure matters as much as headline rate. Long-lived assets should not depend on short-duration facilities that must be refinanced before the investment produces durable cash flow. Variable-rate exposure should be evaluated against a higher-rate case, not only the current coupon. Acquisition debt should leave room for integration volatility, working-capital needs and delayed synergy realization.
A disciplined financing memo should show the base case, downside case, covenant headroom, debt-service coverage, liquidity floor, refinancing date and management actions available if performance falls short. The goal is not to eliminate leverage. It is to ensure the company retains control of its decisions when conditions move against the plan.
06
Run a 90-day capital allocation reset
During the first 30 days, inventory every material use of cash, debt commitment and contingent obligation. Rebuild the baseline using current rates, current operating performance and current working-capital needs. During days 31–60, rank the portfolio using one decision framework and pause projects that cannot show a credible path to economic value. During days 61–90, refinance or restructure avoidable mismatches, set decision thresholds and establish a monthly capital review tied to realized results.
The executive team should leave the process with a clearly defined liquidity floor, an approved hierarchy of capital uses, explicit hurdle rates, downside triggers and one accountable owner for each investment. Capital discipline is not the absence of ambition. It is the operating system that allows a company to keep investing without surrendering resilience or control.
SOURCE NOTES
Authoritative sources
Source references were reviewed on September 28, 2026. King Global analysis and recommendations are identified as interpretation rather than source-reported conclusions.
- 01Federal Reserve — September 2026 FOMC statement
Policy decision and the 3.75–4.00 percent target range announced September 16, 2026.
- 02Federal Reserve — September 2026 Summary of Economic Projections
Median projections for 2026 real GDP growth, unemployment, inflation and the federal funds rate.
- 03U.S. Bureau of Economic Analysis — GDP and corporate profits, second quarter 2026
Second-estimate data released August 26, 2026; BEA noted that the figures were scheduled for revision on September 30.
- 04U.S. Bureau of Labor Statistics — Productivity and Costs, second quarter 2026
Revised nonfarm business productivity, output, hours, unit labor costs and nonfinancial corporate measures.
- 05Federal Reserve — July 2026 Senior Loan Officer Opinion Survey
Bank-reported business-loan standards, terms and demand during the second quarter of 2026.
- 06Federal Reserve Bank of St. Louis — Bank Prime Loan Rate
Daily series sourced from the Federal Reserve Board; 7.00 percent observation for September 25, 2026.