The author of a number of seminal articles on control premiums, minority interest valuation issues, and cost of capital, Eric Nath (Eric Nath & Associates) comments on a recent article in Business Valuation Update. The article covered a webinar Jim Hitchner (Valuation Products and Services) presented in which he challenged the views of Aswath Damodaran (New York University Stern School of Business) concerning the cost of capital. 

“Your article ‘Hitchner Rebuts Damodaran’s Attacks on Cost of Capital Inputs’ might perhaps have been titled ‘Hitchner Attempts to Rebut Damodaran.’ 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. Implied rates of return based on forecasts for some public companies is also a forward-looking approach, but it doesn’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.” (signed) Eric Nath, ASA. 

BVR surveys confirm Nath’s belief that over a third of appraisers look to Damodaran for estimating cost of capital. Also, BVR surveys have shown that about 30% of appraisers look to the Pepperdine Survey (the 2022 edition is now available if you click here).