How do you calculate Beta for a private company?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Private companies have no observable market beta. Process: (1) Select 5–10 public peer companies, (2) obtain their raw (levered) betas from Bloomberg/Capital IQ, (3) unlever each using Hamada: Bu = Bl / [1 + (1–T) x D/E], (4) take the median unlevered beta, (5) relever at the target company's D/E: Bl = Bu x [1 + (1–T) x D/E]. This gives a 'synthetic' beta reflecting the target's industry risk and capital structure.
WHAT INTERVIEWERS LISTEN FOR
- ✓Use public peer companies
- ✓Unlever peer betas (Hamada)
- ✓Take median unlevered beta
- ✓Relever at target D/E
- ✓Synthetic beta for private firm
COMMON MISTAKES
- ✗Using raw levered beta directly
- ✗Ignoring tax effects in unlevering
- ✗Using a single peer company
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