DLOM gauge spiked in 1Q2021, per updated pre-IPO study

BVWireIssue #223-3
April 21, 2021

discount for lack of marketability (DLOM)
pre-IPO, discount for lack of marketability (DLOM)

The use of pre-IPO data is a widely used and accepted method for estimating a discount for lack of marketability (DLOM). New pre-IPO data for the first quarter of 2021 in the Valuation Advisors Lack of Marketability Discount Study should be of interest to valuation analysts.

High discounts: “The pre-IPO discounts this quarter are higher than they usually are,” says Joseph Cotton of Valuation Advisors LLC, the firm that researches and provides the data for the study. “Recently, the stock market has been hitting new highs. Also, valuations for medical, healthcare and drug development related companies have been increasing rapidly in value. These factors led to higher discounts this quarter, as demand for IPO shares increased.”

For U.S. transactions, the median discount was 53.7% for the 1Q2021 zero-to-three-month time frame (compared to 39% for all of 2020 and 21.5% for all of 2019). For all transactions (U.S. and non-U.S.), the 1Q2021 zero-to-three-month time frame median discount was 51.4% (compared to 35.5% for all of 2020 and 21.2% for all of 2019).

Pre-IPO studies and restricted stock studies are the most commonly used methods for estimating a DLOM. Which is better? You should not rely on only one approach but use evidence from several sources for your analysis.

Important tip: Whether you use pre-IPO or restricted stock studies, do not use averages of the data. The characteristics of your subject company much be matched to those companies in the data. This is especially true when considering pre-IPO data. The Valuation Advisors Study (which has over 17,000 transactions from 1985 to the present) allows you to search by industry, revenue, operating income, and assets to find companies that compare closely with the company you are valuing. You also need to ask this question about your subject company: “Is this company really a candidate to take public?”

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