Unlevered beta

The unlevered beta (asset beta, or beta désendetté) measures the systematic risk of a company's assets independently of its capital structure, as if the business were financed entirely with equity. The unlevered beta formula, derived from Hamada, reads: unlevered beta = levered beta / (1 + (1 - tax rate) × Debt/Equity). It isolates the pure business risk of a sector, stripped of the amplification created by financial leverage, which makes betas comparable across companies carrying different debt levels. Unlevering the betas of listed comparables and averaging them provides the sector's business risk benchmark, which is then relevered at the target company's structure to estimate its cost of equity. This comparable-based approach is standard for private companies, which have no observable market beta of their own. Damodaran publishes sector unlevered betas widely used as starting points in practice.

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Its main use is the valuation of unlisted companies. Since no market beta is observable for a private target, practitioners select listed comparables, unlever each observed equity beta with the formula above, and retain the median as the sector asset beta. This median is then relevered to the target's capital structure to produce the levered beta injected into the CAPM for the cost of equity, itself the dominant component of the WACC. The quality of the peer set matters as much as the formula: comparables must share business model, size and cyclicality, and outliers with erratic or negative betas are excluded before taking the median. Sector databases publish industry unlevered betas, but recomputing them from a hand-picked peer set remains the auditable approach in a valuation report.

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Worked example: a listed Swiss sector peer shows a levered beta of 1.30, a debt/equity ratio of 60% and a 14% tax rate. Unlevered beta = 1.30 / (1 + (1 - 0.14) × 0.60) = 1.30 / 1.516 = 0.86, the pure asset risk of the sector. Relevered to the target's 40% debt/equity ratio: levered beta = 0.86 × (1 + 0.86 × 0.40) = 1.16. Applied in the CAPM with a 1.0% risk-free rate and a 6.5% market risk premium, the cost of equity is 1.0% + 1.16 × 6.5% = 8.5%.

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At Hectelion, unlevered beta construction and relevering to target capital structures is rigorously documented in every WACC calculation for unlisted company valuations.