Are business valuations of public and private firms becoming more similar?

BVWire–UKIssue #5-1
August 6, 2019

valuation profession news
private capital markets, public market

Writing last week as a contributor for Forbes, Paul-Noël Guély suggests that ‘distinctions between public and private markets have been gradually diminishing.’ While business valuators recognize that different methods, and public market data adjustments, are still essential, ‘in recent years, liquidity has been shifting towards private capital,’ Guély argues, changing many valuation assumptions.

Guély is the London-based founder and managing partner of Arma Partners, an independent M&A and corporate finance advisory firm with offices in London, New York, and Palo Alto, Calif.

‘There is a clear trend globally of companies staying private for longer,’ he says, which affects risk-free rate and other cost of equity assumptions. The trend is most apparent, as we all know, in technology and the wider digital economy, ‘resulting in sizeable private companies with multibillion-dollar valuations.’

More private debt and equity means lower costs of capital for private companies, Guély states. This is allowing private-market shareholders to exit before traditional options (IPO or sale)—and it offers many more financing opportunities for the growing businesses.

Lower cost of capital draws more diverse investors—and higher business valuations: Guély notes that investors ‘might now comprise a broad variety of alternative asset managers, mutual funds, hedge funds, wealth-management clients, corporates, sovereign wealth funds, venture and growth funds and other forms of non-traditional institutional capital.’

As a result of this liquidity, business analysts may find that private-company balance sheets begin to look more similar to—or even richer than—those of listed companies with larger R&D, capex, divisional startup losses, and innovation funds than their listed peer group. And the private-market companies may be now equally well positioned to withstand the risks of international business expansion or acquisitions, BVWire—UK notes.

Private capital markets account for an estimated 6% of the value of corporate equity and credit issuance, so significant room for further expansion and similarities remains. ‘The emergence of deeper and more liquid private capital markets looks to be an irreversible trend,’ for both investors and business valuators, Guély concludes. 

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