Do you ever wake up in the middle of the night with weird BV thoughts? If not, I am happy for you. If so, welcome to the club!
My most recent weird night BV thought was whether the size premium component of the equity cash flow discount rate applies to passive holding entities. (Believe me, I have had even weirder ones, none of which I am going to share, in order not to scare you.)
Up until this thought, I always automatically applied a size premium whenever I calculated the cost of equity capital, regardless of whether the subject was an operating company or a passive holding company, and to be honest, the question had never entered my mind (such as it is).
The specific question that awoke me was whether there is a difference in risk between a $100,000 portfolio and a $100,000,000 portfolio. At first blush, my answer was that there is none, because both can invest in (say) a stock index fund and have the same risk / return profile. On that logic, there would be no rationale for a size premium.
I could not find any discussion of this point in the literature, so I put the question to my American Business Appraisers National Network (businessval.com) colleagues. They always provide great advice, and this was no exception. Brandi Ruffalo pointed out that the $100,000,000 investor has access to a wider range of investments, hedging tools, institutional research, and sophisticated management than the $100,000 investor has. The smaller portfolio will therefore be more risky, justifying a size premium. Sherri Smith mentioned Berkshire Hathaway as an example of a holding company that is less risky than a smaller portfolio. Jim Lurie pointed out that each portfolio investment has a size premium, and these could be calculated and weighted-averaged for the portfolio.
The moral of the story is when in doubt, ask your colleagues! Do NOT call THEM in the middle of the night, but feel free to call ME THEN because I will probably be awake pondering some new weird BV thought!