New independent analysis tests IPCPL reliability


In a paper published in the latest edition of the ASA’s Business Valuation Review, the author describes an empirical test he conducted of the implied private company pricing line (IPCPL). This is a new method designed to eliminate the inherent problems in comparing public and private data and to add another approach in estimating the cost of capital for a privately held business.

High marks: The author, Igor Gorshunov, a business valuation and private equity professional, conducted an empirical test of the IPCPL cost of capital and the concept of margin reversion. He describes the test: “By arranging companies in the market by their operating profit margin we could observe the market valuation line (based on the market data) and steady-state valuation line, which represents the hypothetical valuation of the company based on the IPCPL cost of capital and constant growth rate. If both IPCPL cost of capital and the margin reversion concept are correct, these two lines should intersect at the point of average margin.” For the test, the author used 840 data points on private-company transactions sourced from Pratt’s Stats. Based on the test results, the author states: “This independent test indicates that IPCPL is a reliable source for small private companies’ cost of capital.”

The developers of IPCPL are Bob Dohmeyer, Pete Butler, and Rod Burkert. “We were introduced to Igor after he wrote this paper, and we have come to know him as a well-respected economist and mathematician,” Butler tells BVWire. “We certainly appreciate Igor’s interest and this is now the second formal independent validation of our work. It is always nice to meet someone in the industry who is open to new ideas. We look forward to others taking a look at IPCPL and the feedback that will come. We are hopeful that others will find it as useful as we have.”

In his remarks, Butler is referring to a recent paper on SSRN that calls IPCPL a “significant innovation in the valuation of privately-held, small-or-medium-sized enterprises (SMEs).” (See the June 24 issue of BVWire.)

See for yourself: Appraisers should read the material on BVR’s special IPCPL Web page and develop their own conclusions. On that page, you also have complimentary access to the IPCPL-based BUM WACC calibrator tool that is updated monthly. The Gorshunov article, “IPCPL and Margin Reversion: Implications for the Valuation of Small Privately Held Companies,” will be in the September issue of Business Valuation Update.


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