Spring brings with it many exciting things: the ability to go outside without 43 layers on, the March Madness broadcast, the vibrancy of cherry blossoms and, most importantly, the publishing of the 2019 Pepperdine Private Capital Markets Report (“PPCMR”). Perhaps you may not agree with that last one, but for us valuation folks, it is like Christmas in March.
This publication is so important because it is one of the few sources that allows us to understand the expected rates of return/cost of capital for private companies. Rates of return/cost of capital are generally determined based upon the historical performance of publicly traded companies. While this data is valuable, adjustments must be made to account for differences between public and private companies (e.g., size, liquidity). Fortunately, the PPCMR surveys actual participants in the private capital market (e.g., bankers, private company executives, private equity groups, venture capital groups, business appraisers) to understand their view of risk and return in the marketplace.
For example, the 2019 PPCMR found that interest rates on bank loans range between roughly 4% and 7% while mezzanine rates of return range between 12% and 18% depending on the size of the loan. Private equity investors, on the other hand, expect rates of return between 20% and 38% depending on the EBITDA of the target company.
While this data is a goldmine for those of us doing valuations, the PPCMR also compiles other general market information that could be valuable for businesses of all sizes. For example, a few of the many survey topics include:
- Expectations for business and industry conditions;
- Leverage multiples for lending;
- Advance rates on various assets for loans; and
- Deal multiples by company size and industry.
If you’re interested in talking more about private company costs of capital, the PPCMR, or anything valuation related, please reach out to me at 412-697-5281 or [email protected].
