Small-cap premium for valuation

searcher profile

September 12, 2019

by a searcher from IE Business School in Madrid, Spain

In reviewing our financial model for Emptio Capital, a question came up: Do I have to take into account an additional premium for the valuation of small-cap companies? Here's an interesting article I have found and I would like to share with all of you.

redacted@lotusamity/business-valuations-applying-a-small-cap-premium-d0718472649f

2
3
120
Replies
3
commentor profile
Reply by a searcher
from INSEAD in Zürich, Switzerland
Assuming you are trying to derive WACC - in my view in a search fund your expected return on equity is not a theoretical number but something around ~35%, which is the mean return and the return we should target to get our full vesting. I personally don't think that a DCF is the best tool for valuing search fund businesses and would stick to plain multiples and an LBO model.
commentor profile
Reply by a searcher
from IE Business School in Madrid, Spain
Thank you @Maximilian for your reply. Just add that I like to valuate through DCF to compare with other methods such as comparable, multiples, etc.. It gives me an idea of the different components of WACC, not only equity cost, which is very useful for me to understand both the company and where its value comes from.
commentor profile
+1 more reply.
Join the discussion