Surprisingly, over half (54%) of privately held business owners believe their cost of equity is less than or equal to 12%, according to the “2018 Private Capital Markets Report” from Pepperdine University Graziadio School of Business and Management. Approximately 19% of respondents indicated their business cost of equity capital is in the range of 9% to 10%, the range most cited.

The findings of the survey represent “a significant misunderstanding by many business owners of their cost of equity,” the report says. The survey involves asking private capital market players what returns they project. The players are bank lenders, asset-based lenders, mezzanine lenders, private equity groups, venture capital, and angel investors. We note that the majority of private firms that responded had 20 employees or fewer, with 50% having no more than five employees. Also, over half of them had annual revenues less than $1 million.

For more information: Dr. Craig Everett, who runs the Pepperdine project, will give a presentation at the ASA/USC 12th Annual Fair Value Conference in Los Angeles on May 10. Also, check out an article, “Looking to Private Markets for Private Firm Cost of Capital” (purchase or subscription required), that describes Pepperdine’s private cost of capital model.