Hi all, beta is a measure of non-diversifiable (market) risk. We assume investors are diversified. However, a private company holder might not be diversified. I believe in terms of a private company investor, company specific risk is also relevant.
So is it correct to use beta when valuing a private company?
My two cents: it’s correct to the extent that you don’t fool yourself into thinking that a regression beta (or even a bottom-up beta) captures all of the risk you believe is entailed with being an investor in a private company. Surely even a private company has general market risk that an otherwise identical public company is exposed to (i.e, so non-diversfiable risk is a factor, and must be considered and estimated in some way)… but that may not be the whole story for the private company, and that’s where additional risk premiums are typically tacked on to try and “account for” those additional risks your particular private company is exposed to.