Module II· Cost of Equity & CAPMAdvanced
Question
What is the 'middle-market discount' in the cost of equity?
Answer
Mechanics
The middle-market discount is an add-on to the CoE for mid-cap family-owned companies — driven by:
- Illiquidity: no public market.
- Information density: lower than for public comps.
- Concentration risk: often single-family ownership.
- Governance: family conflicts, succession questions.
Size
typically a 2–4% add-on.
Deep diveShow more details
Example
Inputs:
- Pure CAPM CoE: 9%
- Middle-market discount: 3%
Calculation:
```
Effective CoE = 9% + 3% = 12%
```
Effect
Valuation falls by 15–25% versus a publicly traded comparable.
Pitch tip
The middle-market discount is contested — sellers argue against it, buyers (PE) for it. In a pitch: show it explicitly, defend it transparently, don't bury it.