Yield Compression

A discount rate that incorporates a premium reflecting the specific risks associated with a particular asset, cash flow stream, or investment. In intangible asset valuations, risk-adjusted discount rates are typically higher than the weighted average cost of capital to reflect the greater uncertainty inherent in intangible asset cash flows compared to tangible assets.

The theoretical rate of return on an investment with zero default risk, used as the foundation for building discount rates in valuation. In practice, the yield on government bonds of a maturity matching the expected cash flow duration serves as a proxy — typically US Treasury bonds for USD-denominated valuations or UK gilts for GBP-denominated analyses.

The implied cost of future rework caused by choosing a faster, easier, or less thorough solution during software development instead of a better approach that would take longer. Technical debt accumulates interest in the form of increased maintenance costs, reduced development velocity, and higher defect rates.

A style of private equity investment focused on mature, profitable, or near-profitable companies seeking capital to accelerate expansion without ceding majority control. Growth equity investors typically target businesses with proven product-market fit and strong intangible asset bases, providing capital for scaling operations, entering new markets, or funding acquisitions.

An adjustment applied to the standard WACC to reflect the additional risk associated with specific intangible assets or early-stage businesses. Intangible-heavy investments typically warrant a higher discount rate than the firm-level WACC because their cash flows are less certain and more sensitive to competitive and technological disruption.

A reconciliation tool used in purchase price allocations to verify that the weighted returns implied by the fair values assigned to all acquired assets — tangible and intangible — are consistent with the overall cost of capital for the business. WARA serves as a reasonableness check under IFRS 3 and ASC 805 to ensure that no individual asset class has been materially over- or under-valued.

The return that could have been earned by investing in the next best alternative of comparable risk. Opportunity cost of capital is the foundation for discount rates used in intangible asset valuations and investment decisions, ensuring that capital is allocated to its most productive use.

A tradable certificate representing the right to emit one tonne of carbon dioxide equivalent, or a verified reduction or removal of one tonne of CO2 equivalent from the atmosphere. Carbon credits are traded on compliance markets (such as the EU Emissions Trading System) and voluntary markets, and represent an emerging class of intangible asset with growing valuation complexity as climate regulation intensifies.

What is the weighted average cost of capital (WACC)?

WACC is the average cost of all capital sources (debt and equity) a company uses, weighted by their proportions — it is the minimum return the company should generate to satisfy all investors.

How should companies account for AI infrastructure investments?

AI infrastructure investments — including GPU clusters, MLOps platforms, and data pipelines — are accounted for as either tangible assets (hardware), intangible assets (software platforms), or operating expenses depending on their nature and usefu...

What does it mean to be transparent about technology debt?

Technology debt—quick hacks, legacy code, unscaled infrastructure—should be acknowledged and itemized. Hiding it until post-acquisition acquisition is fraud.