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Management in Practice

What new form of capital could change the world in the next ten years?

Q(n) readers offer a variety of perspectives on the question.

Bryan Garcia
Program Director, Center for Business and the Environment at Yale
A: A price on carbon. Over $60 billion worth of allowances and project-based transactions from $10 billion only two years ago represents great promise to improve the efficiency and productivity of our energy systems, create the new “green jobs” of tomorrow, today…all the while reducing global warming causing greenhouse gas emissions. It’s a start!

Brian Upbin ’00
As an observer of the global capital markets, I have no doubt that the continued pace of financial innovation will consistently sprout new and exotic forms of economic capital that I can only begin to dream of.

However, what I am most interested in witnessing over the next 10 years are changes in the opportunity costs of capital as individuals and institutions are forced to give second thought and prioritize what is truly necessary, accepted luxury, and flat-out wasteful. What has been an accepted norm of near-unadulterated consumption will be challenged by more rational decision-making that requires the precise valuation of the opportunity cost of capital (both tangible and intangible), and more thought on the consequences of how existing capital is both accumulated and deployed.

In other words, I think the bigger impact over the next 10 years will be not in what new forms of capital are created, but in how successfully existing capital (not just economic, but also social, intellectual, and cultural capital) is managed.

Pramit Mitra ’09
I believe that microfinance will come to play a very important role in the next ten years and will create new forms of capital to fight poverty. Advances in microfinance will facilitate other types of innovations to develop services for the poor in developing countries. The key test will be whether policymakers will be able to create the new forms of engagement and relationships needed to better leverage microfinance structures and processes to scale up these programs and have an impact on a macro level.

Shyam Sunder
James L. Frank Professor of Accounting, Economics, and Finance, Yale School of Management
A: Biological capital in the form of DNA/RNA/protein designs could, and very likely will, change the world. However, the extent to which such designs will remain patentable is open to question.

Paul Keenan ’96
Senior Associate Dean and Director of Development in the Faculty of Arts and Sciences, Harvard University
A: Today’s “new capital” has the potential to be a positive actor on two fronts. Not only are hedge funds, private equity funds, and sovereign wealth funds channeling capital across the globe into new markets and new investment opportunities, but the immense personal wealth that has been accumulated by the leaders in these fields has also begun to make its way into the philanthropic sector. These emerging philanthropists are beginning to make substantial social investments in research and innovation around energy and the environment, global health, fundamental scientific discoveries, and social mobility through education. American higher education is a lodestone of creativity and innovation globally, and this new wealth created from the “new capital” continues to be redeployed through philanthropy in what I see as a powerful virtuous circle.

Rick Antle
William S. Beinecke Professor of Accounting, Yale School of Management
A: I am interested by the phrase “what forms of capital.” I take it you mean what the sources of capital are likely to be, or the vehicles for accumulating, delivering, and distributing the returns from capital. Regardless of the vehicles from which it is delivered, capital can only come from one source — the people who own / control it. As for the vehicles, it is difficult for me to imagine new ones, given the wide range available now. We have everything from microcredit to sovereign funds. I would expect, however, that excess returns from passive investments in marketable items would continue to be competed down, and that only private equity would have the chance to create consistent, outstanding investment performance.

Austin Whitman ’07, FES ’07
Consultant, Cambridge Associates
A: Earlier this year the venerable private equity firm KKR and the Environmental Defense Fund announced a collaboration on the environmental performance of KKR’s portfolio companies. This was just the beginning. Over the next 10 years the motives and tenets of socially responsible investing, which started as a relatively simple movement among retail investors, will mature into a textured set of expectations among more sophisticated institutional investors. Endowments, foundations, and pensions will add environmental and social governance criteria to their asset allocation models. The biggest incremental impact will be felt by the private equity fund sponsors they capitalize. These groups, full of political clout and business savvy, added $300 billion of new capital to their arsenals in 2007 and have become a powerful force. The KKR-EDF alliance is the first public indication that a new form of capital is shaping up: institutional money teamed with skilled private equity investors who will spawn world-changing businesses, projects, and ideas.

Abby Goward ’08
Marketing Product Manager, Bank of America
A: Obviously, the responsible use of capital will be key to revitalizing the world economy. In a tough economic environment, corporations often lose sight of the ways they can make a positive impact on the communities and environment around them. Luckily, companies like Microsoft set an example of how corporations can be dedicated to crushing the competition as well as making a difference. Many private equity firms also have impressive charitable initiatives that some may criticize as public relations efforts. Whatever their motivations, their gifts are helping nonprofit organizations make a difference!

Tony Sheldon ’84
Lecturer in Economic Development and Executive Director, Program on Social Enterprise, Yale School of Management
A: There is increasing interest among investors in microfinance — generally defined as banking services to poor and low-income people in developing countries. These investors run the gamut from social investors looking to support a “double bottom line” of financial returns blended with social impact to hedge fund managers seeking out new profit-maximizing opportunities. The pros and cons of having “blended value” investors versus proft-maximizers underwriting microfinance are much debated. But this emerging market for debt and equity holds the potential to funnel significant flows of resources to expand the reach of microfinance institutions, whose clients have until now been largely excluded from access to formal financial services. This new flow of capital could make a significant difference in the daily lives of millions of very poor households.

Steve Algert ’90
Director of Hedge Funds, John Paul Getty Trust
A: I think an important source of transformational capital in the future will be social capital coming from the current generation of entrepreneurs. Many of these successful billionaires are inclined to give their money away or spend it on social projects rather than pass it on to their heirs. The capital may be spent in a more results-oriented manner, almost as if it were a for-profit enterprise. This capital also will have a multiplier effect, encouraging others to give or demanding matching funds or resources. Bill Gates is a prime example of this new generation of giver.