The valuation of closely-held companies in Latin America

M&A activity has greatly increased in Latin America in the recent past. As a result, the improvement of valuation techniques has gained a prominent place in the agenda of investors and financial analysts dealing with the region. The task entails two substantial challenges, however. First, fundamental valuation requires the determination of an appropriate cost of capital, and the traditional CAPM-based models which are normally used to compute it are difficult to apply in such transitional, less efficient markets. Second, most companies and transactions in Latin America are closely-held operations, and hence bear components of unsystematic risk which classical appraisal techniques do not easily capture. In this paper, we develop a comprehensive fundamentals-based valuation model and provide supporting empirical data for valuing privately-held companies in Latin American emerging markets.