What discount rate is typically expected when valuing underlying assets in a fund?

The choice of a discount rate of 12-15% for valuing underlying assets in a fund is based on several key principles in finance, particularly related to the risk associated with those assets. The discount rate reflects the expected return that investors require for taking on the risks associated with investing in private capital assets, which often include equities, real estate, and venture capital projects.

A rate in the range of 12-15% typically accounts for the inherent risks, such as market volatility, illiquidity, and the longer investment horizons characteristic of private capital investments. These factors lead investors to demand higher returns compared to more stable and liquid investments, such as government bonds or blue-chip stocks, which would attract lower discount rates (like 5-7% or 8-10%).

This higher range also considers other variables including the stage of the investment (e.g., early-stage versus late-stage), the specific sector in which the fund operates, and the overall market conditions at the time. Hence, a 12-15% discount rate aligns with the expectations and realities of investing in a fund where returns are anticipated to compensate for the additional risks involved.

In summary, the correct choice reflects a balance between risk and expected return, clarifying why this