Private Company Valuation: How Credit Risk Reshaped Equity Markets and Corporate Finance Valuation Tools

01 02 The recent crisis in financial markets has seen a gradual erosion of the boundaries of asset classes previously regarded as risk-free. We have gone from a world mostly free of default risk to one where credit risk is largely reflected in equity prices. Traditional valuation methods now need to be integrated to take into account a scenario in which expectations of growth are considerably reduced, and credit risk is increased to levels previously unheard of. But as the majority of private companies are sub-investment grade, Valuing Private Companies: How Credit Risk Reshaped Equity Markets and Corporate Finance Valuation Tools sets out an innovative new method for estimating private companies' cost of equity based on a Fixed Income Approach (FIA). The book begins by introducing the changing landscape of financial markets post crisis, discussing the notion of 'risk free' asset classes and how equity valuation methods are changing in the light of credit risk. Oricchio then goes on to illustrate the limitations of traditional methods for estimating the economic value of non-listed companies, demonstrating that methods such as the Capital Asset Pricing Model (CAPM), which are market-based, cannot effectively capture credit risk in sub-investment grade companies. The author advocates the use of a new model to estimate the cost of equity – the Integrated Pricing Model (IPM). This new model combines CAPM with a second method based on fixed income type logic, known as the Fixed Income Approach (FIA).The second part of the book then applies these new IPM equity valuations, based on corporate rating models for private companies, to a range of country specific cases covering the USA, Japan, China, Russia, India and Italy. In addition to the book's theoretical insights, illustrating in great detail the relationship between default risk and equity risk premium, readers will benefit from the practical experience the author has accumulated as a risk manager within major banking groups such as UniCredit Group, Capitalia SpA, and Banca di Roma SpA. 02 02 The recent crisis in financial markets has seen a gradual erosion of risk-free asset classes. In equity markets the credit risk has reached a critical level in valuation. Here a new cost of equity method for private companies is presented based on the pricing of junior subordinated notes. Global business cases are illustrated to support this. 19 02 Author has been Head of ACPM in Capitalia Banking Group and Head Group