The author of a number of seminal articles on control premiums, minority interest valuation issues, and cost of capital, Eric Nath (Eric Nath & Associates), responded to BVR in support of Aswath Damodaran’s (New York University Stern School of Business) views concerning the use of forward-looking cost of capital indicators.
My understanding is that probably 35% to 40% of appraisers (never mind academics) agree with Damodaran in whole or in part. Many of us never use historical data at all for ERP, size premiums or much of anything else. See the following article for detailed reasons why: The Big Myth. At this point the Pepperdine Survey is the best source of forward-looking required rates of return in the US. Implied rates of return based on forecasts for some public companies also offer a forward-looking approach, but they don’t really deal with lack of control or marketability/liquidity that impairs value for minority ownership positions in small private companies. It would be great to see the Pepperdine researchers figure out a way to get into the deeper, darker recesses of minority interests in smaller closely-held businesses, but at least for now the Survey’s venture capital and private equity segments get closer than anything else to what we need.
BVR surveys confirm Nath’s belief that over a third of appraisers look to Damodaran for estimating cost of capital. The Pepperdine Survey includes many UK participants but is not widely used currently (the 2022 edition is now available if you click here).
Please let us know
if you have any comments about this article or enhancements you would like to see.