CHAPTER 23
Cost of Capital of Family Holding Company Interests
William H. Frazier
Relationships between Time to a Liquidity Event and Value
Family Holding Companies Are Typically Very Long-term Investments
Asymmetrical Information and Lack of Control
Incremental Required Rate of Return for Asymmetrical Information and Lack of Control
Estimating the Cost of Illiquidity
Empirical Studies on Embedded Illiquidity
Measuring Illiquidity from Market Data
Illiquidity Premium for Equity Investments
Increasing Cost of Illiquidity over Time
INTRODUCTION
Family holding companies (FHCs) are closely held investment entities such as family limited partnerships (FLPs) and limited liability companies (LLCs) that hold investment assets such as stocks, bonds, and real estate.1 Occasionally, these entities may own an operating business.
In the traditional market approach to valuing equity interests in FHCs, the major objectives are to determine the appropriate discounts for lack of control and lack of marketability. These discounts, when applied to the net asset value (NAV) of the entity, provide estimates of fair market value.
The nonmarketable investment company evaluation (NICE) method is a valuation method under the income approach. It is designed especially to determine the fair market value of equity interests in family holding companies by ...
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