You cannot use macroeconoimc model or capm or Fama French for privately held or thinly traded companies because betas are not obtainable for these companies and the models require betas. Recommendation is to use buildup method such as bond yield plus risk premium. However, a few pages beforehand, Schweser shows how to unlever beta from a public company to find a beta for a privately held or thinly traded company. So my question is, why can’t you use this beta and use macroeconomic, capm, FF, etc. methods that require beta if you have found a beta? Is it just because there’s too much estimation error? Thank you.
I was under the impression that you could use the “new” beta in the macro, CAPM, and FF… but because of the potential estimation error, that the build up method might be a better alternative. Not to mention you might not even be able to find a suitable company that fits what your trying to estimate in order to derive the new beta. I think it said they can both be used but that build up is a safer bet in these instances. Correct me if i’m wrong. (it happens frequently)
The build-up method is used for closely held companies, which isn’t the same as thinly traded companies or non public companies, right? Could that be the difference? Not sure.
"You cannot use macroeconoimc model or capm or Fama French for privately held or thinly traded companies because betas are not obtainable for these companies and the models require betas. " who made that bold assertion which confidently wrote off pages of private equity valuation methods?
schweser book 4 pg 59
the show NY Wrote: ------------------------------------------------------- > schweser book 4 pg 59 idiots
so as far as my originial question, is it accurate to assume that although beta can be estimated and applied to those methods for thinly traded or private companies, build up method is preferred because theres less error? kind of what cf-AHHH said
i completely disagree. the build-up method is just dumbed-down version of the capm. there is an industry risk premium there. where is it coming from? it has the same “error” or “uncertainty” as coming up with a beta and multiplying it by the market risk premium in order to capture industry-specific risks.
What’s the significance of the build-up method being used for closely-held companies only? Any one? I’m sure I put down in my notes that it is not for thinly traded or non public, but only for closely held.
if you have a sniper rifle and some bullets handy, use it instead of throwing a stone?
dreary, whats the difference betweeen non public and closely held? i think u may be right about the nonpublic part… shcweser seems conflicting b/c it says that buildup method is used when betas are not readily available. but bond yield plus risk premium method is a type of build up method. and bond yield plus risk premium method uses publicly traded long term debt. so it wouldnt make sense for build up method to be for non public companies.
But a closely held company may have publicly-issued debt, often do. So, I think the build-up method is probably appropriate for a company whose equity is private but its debt public? I dunno. I’m not sure that by estimating a company’s beta you can use CAPM if the company has no traded equity. In short, I don’t know.
you can use the build-up method with: 1)private equtiy, private debt 2)private equity, public debt you can use the capm with: 1)public equity, private debt 2)public equity, public debt 3)private equity, public debt* 4)private equity, private debt* *for these, you will estimate the beta based on public comparables. you’ll unlever it, and re-lever it using your target’s cap structure and tax rate. if you can use both the build up and the capm, then use the capm. the build up will apply some generalized industry-wide risk premium. in the capm, this is substituted by your company’s specific beta (if equity is public) or by the beta of closely comparable public companies (if equity is private). hence, dont use the build-up with public equity cause you can (almost) always measure the beta and use the capm. don’t use the build up with private equity unless you absolutely cannot find adequate comparable public companies from which to get an approximation for your private equity beta. do use the build up if you are going to a litigation trial where you are an expert witness to a company’s valuation (public or private, irrelevant) cause otherwise good luck explaining to some jury what a “capm” is while the opposing expert tears you apart with his simple easy-to-understand build-up method. if anybody disagrees or has a different view, i’d like to hear your arguments. i think this is best practice from industry standpoint.
Just going through my notes and wanted to follow up with this: Thinly traded and nonpublic companies: 1)Select comparable benchmark 2)estimate benchmark beta 3)unlever benchmark beta Bu*(1/1+(D/E))Be 4)lever beta to match companies leverage Be=(1+(D/E))Bu Does this make sense?
trek7000 Wrote: ------------------------------------------------------- > Just going through my notes and wanted to follow > up with this: > Thinly traded and nonpublic companies: > 1)Select comparable benchmark > 2)estimate benchmark beta > 3)unlever benchmark beta Bu*(1/1+(D/E))Be > 4)lever beta to match companies leverage > Be=(1+(D/E))Bu > > Does this make sense? Yup
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