Private firms' cost of equity estimates may surprise you

Over half (59%) of privately held business owners believe their cost of equity is less than or equal to 12%, according to the “2017 Private Capital Markets Report" from Pepperdine University Graziadio School of Business and Management. What’s more, half (50%) of the 1,034 respondents say it is no higher than 10% and almost a third (31%) say it is less than or equal to 8%. These results may be a little surprising to some appraisers.

Private view: The survey was released in January 2017, and it represents the hard work of Pepperdine researchers in developing a private cost of capital method as a legitimate alternative to looking to the public markets. Their method is refreshingly simple: They ask private capital market players what returns they project. The players are divided into six segments aligned with the major institutional arms of the private investment world, each with different return, investment, and research characteristics. The segments 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 55% having no more than five employees. Also, approximately 58% of the respondent firms had annual revenues less than $1 million.

For more information:  BVR is a research sponsor in Pepperdine’s efforts, which started back in 2007. Dr. Craig Everett, who runs the program, will give a presentation at the ASA/USC 12th Annual Fair Value Conference in Los Angeles on June 1. Also, an article in the June issue of Business Valuation Update, "Looking to Private Markets for Private Firm Cost of Capital," reviews the latest Pepperdine report and describes its private cost of capital model.