Interest rates may stay higher for longer, AI is absorbing vast sums of capital, and building anything in Britain remains a challenge. Dr Gerard Lyons joined senior private capital professionals at The Stafford London to explore what this means for private capital CFOs.
War, artificial intelligence and resilience. Those were the three words economist Dr Gerard Lyons used to frame the global outlook at the recent Gen II Dinner Debate.
It is an unusual combination. Geopolitical conflict is putting pressure on prices, AI is attracting extraordinary investment, and the global economy keeps growing despite repeated predictions of a slowdown.
For private capital investors, there is plenty to be encouraged by. But an economy that refuses to slow down gives central banks fewer reasons to cut rates. That raises an uncomfortable question for CFOs: what if the cheaper financing everyone has waited for takes much longer to arrive?
A stronger economy, but not for everyone
The UK illustrates the contradiction. Lyons described a K-shaped economy, in which some sectors perform well while others struggle under borrowing costs. Consumer spending and services have shown resilience. Housing, construction and rate-sensitive businesses have faced a much tougher environment.
For private capital managers, these differences matter more than headline growth. Two businesses in the same economy can have very different financing needs and prospects. The task is identifying which businesses can sustain growth today, and which depend on a meaningful fall in borrowing costs.
The end of cheap money?
Cheap money makes almost everything look like a good investment. Asset prices rise, weaker businesses survive, and investors have less reason to separate productive companies from those kept alive by cheap credit. Lyons argued this was a lasting legacy of the years after the financial crisis, with zombie companies persisting and stronger growth businesses struggling to raise capital.
Higher rates could reverse that. When money has a real cost, investors become more selective, cash generation matters more, and capital is more likely to reach companies that can use it well.
The transition is the painful part. A company that borrowed heavily near zero rates may look very different when that debt is refinanced. Cash that once funded expansion now services debt, valuations come under pressure, and plans built on cheap money need revisiting.
For fund CFOs, debt maturities, liquidity, interest coverage and exit timing all become more consequential. Lyons also described a K-shaped UK economy, so the same rate environment can produce very different outcomes depending on where a fund has invested.
A government with difficult choices
The UK's public finances add another layer. Lyons set out the limited options for a government with substantial debt: encourage growth, reform public services, cut spending, raise taxes, borrow more, or let inflation erode the debt's real value. Each has consequences.
Investor confidence in UK government debt matters too. Higher gilt yields feed into borrowing costs across the economy, affecting businesses and investors well beyond the bond market. For private capital, fiscal credibility is commercially relevant, because it shapes the cost of financing and the conditions in which portfolio companies operate.
Is AI a revolution or a bubble?
Asked from the floor whether AI is a bubble, Lyons answered directly: yes, it could be, and it could still change the world.
Nineteenth-century Britain offers a parallel. Investors poured money into railways, convinced they were financing the future. They were right about the technology and less right about some of the investments. Many railway companies collapsed, but the lines transformed trade and growth for generations. An industry can create enormous value without every company producing attractive returns.
The sums today are extraordinary. Lyons cited investment by five major technology companies rising from around $200 billion two years ago to an estimated $800 billion this year, with spending potentially reaching $5 trillion to $7 trillion over five years. Funding is also shifting from internal cash towards borrowing. If demand grows more slowly than expected, debt repayments will not wait for the technology to mature. As Lyons put it, not every company can be a winner.
The AI revolution also depends on electricity. Data centres need enormous power, and the grid, generation and connectivity behind them require heavy investment. Lyons questioned whether the UK has enough power and capital to support its AI ambitions. That creates opportunities in energy infrastructure and data centres, along with challenges in development costs, timelines and approvals.
Lyons' most interesting point was that AI's benefits could outlast a financial correction. Productivity gains, new applications and infrastructure built during the boom could keep creating value after the financing has changed. For CFOs, the key distinction is between technological potential and investment returns. Each route, whether building AI, supplying its infrastructure or using it to become more productive, carries a different mix of capital needs, risk and return.
Everyone wants growth. Somewhere else.
Britain wants more homes, infrastructure and data centres. But try building one nearby and enthusiasm quickly fades. New developments bring pressure on schools, roads and healthcare, while much of the economic benefit flows beyond the local authority that absorbs the disruption. One participant suggested this helps explain why councils can resist projects that serve national growth. Lyons agreed that incentives matter.
Devolution is often presented as the answer, but Lyons was not convinced the current approach would deliver. Effective devolution, he argued, needs access to finance, real decision-making powers, incentives for enterprise and accountability for the financial consequences of decisions.
Approval is not the same as delivery. Can the construction sector absorb a sharp rise in housebuilding? Are there enough skilled workers and materials? Can the grid cope with new demand? Grid connections and construction capacity can decide whether an attractive project is viable.
Delay is expensive. Every extra month can raise financing costs, push back revenue and add uncertainty to budgets. For fund CFOs, that shapes how projects are financed, how much liquidity is held and when returns can realistically be expected. Strong demand is not enough if a project cannot be delivered.
Britain's pension question
Britain needs homes, infrastructure and growth capital, and it holds large pools of long-term pension savings. On paper, the answer looks simple: direct more pension money into Britain. In practice, it is not that straightforward.
Trustees must deliver outcomes for their members. A British infrastructure project has to compete on its investment merits, not its postcode. A national policy goal does not automatically produce an attractive investment.
The investor base is also changing. Defined benefit schemes are transferring liabilities to insurers, defined contribution assets keep growing, and local government funds are consolidating. A fund with decades-long horizons approaches illiquid infrastructure differently from an insurer matching specific liabilities. There may be plenty of money in the system, but investors are not all looking for the same thing.
The sharpest question of the evening was about supply. If few commercially viable projects exist, pushing more capital at them will not solve the problem. That points to planning and infrastructure for policymakers, and to finding and developing investable opportunities for fund managers. Private capital can help bridge that gap, but must also consider fund structures, liquidity, reporting and the timing of returns.
Building the conditions for investment
Across every theme, the same conclusion emerged. Britain does not simply need more capital, cheaper money or bigger announcements. It needs fiscal credibility, interest rates that businesses can plan around, planning and infrastructure that let projects proceed, and investment structures that suit the institutions whose capital is needed.
For private capital CFOs, the immediate priority is commercial: making sure financing structures, liquidity and investment assumptions can support growth. The global economy has proved remarkably resilient. The question is which businesses and investors are best placed to turn that resilience into returns.
This article is based on a recent event hosted by Gen II at The Stafford London, where Dr Gerard Lyons joined senior private capital professionals to explore the economic forces shaping financial markets, investment decisions and the outlook for growth.
