Which have higher valuations; public companies or private companies?
A deceptively simple question I am stumped on. Which would have a relatively higher valuation for the same company, public or private co.?
I’ve heard the below contradictory arguments, someone please explain which is right.
1. Public companies. They should be higher valuation because of liquidity premium (can easily trade the stock) and because there’s still way more capital for public companies (every well-to-do old person in the country is in stocks only, pension funds and hedge funds and mutual funds and sovereign wealth funds all are way more invested in public markets, making even blackstone PE look like peanuts).
2. Private companies. These should be higher valuation because of the control premium, there’s a lot of value in actually controlling how a company operates. Private companies are also higher levered which should mean higher valuations. Plus, in almost all take privates the sponsor offers 15%+ premium over the public company share price. Wouldn’t be the case if public companies were higher valuation than private. There are also tons of PE firms and private capital chasing limited companies.
So, fellow monkeys, please put together your collective handful of brain cells and help me out!
Ah, the age-old debate of public versus private valuations! It's like trying to compare bananas to plantains - they might seem similar, but they're different in their own ways.
Public Companies: You're right on the money here. Public companies often have higher valuations due to the liquidity premium. This means investors can easily buy and sell shares, which adds to the value. Plus, public companies have a larger pool of capital to draw from, including everyone from retirees to large institutional investors. This can drive up the price of shares and, by extension, the company's valuation.
Private Companies: On the other hand, private companies can command higher valuations due to the control premium. This is the idea that having control over a company's operations adds value. Private companies also tend to have higher leverage, which can increase valuations. And you're right, when a company is taken private, the buyer often pays a premium over the public share price. This is because they're buying not just the shares, but also the right to control the company's operations.
So, which is higher? Well, it's not a straightforward answer. It can depend on a variety of factors, including the specific company, the industry, market conditions, and more. It's like trying to decide whether a banana or a plantain is better - it really depends on your taste!
But remember, whether you're dealing with a public or private company, the value of any investable asset is its future cash flows, weighted by time, and adjusted for risk. Evaluating these factors can be more challenging for small private companies due to the lack of available data and increased ambiguity.
So, keep your wits about you, and remember - every company, like every monkey, is unique!
Sources: Valuing a small privately held services company, 75-bps Fueling a Rally | The Daily Peel | 7/28/22, Why are private markets outperforming public markets?
Gotta love when the bot, with all the knowledge of the entire internet, still does not answer your question or have any sort of slight opinion that would help whatsoever. Monke, you literally just rephrased my question back to me.
Thx for your wisdom
I think you have valid points for both, but the public reasons outweigh the private. Also for public - investors are willing to pay more for the increased transparency/information that comes from public reporting requirements.
All else equal, I’d say public. Liquidity as well as additional expenses that goes towards public costs (Board, reporting, etc) both prop up the price
There are scenarios that can change this, for example if a public company has no float/trading volume or any actual liquidity benefits from being public for whatever reason
But ultimately a normally run public will be worth more
From a theoretical perspective, an identical public/private company should have the same equity value regardless of ownership structure as long as it is managed identically. In practice, different investors value liquidity vs. control premium differently, so the "market value" will depend on the asset in question and the investor base's risk tolerance, liquidity needs, and whether they want to be active or passive managers.
From a transaction perspective, we almost always see a premium paid on public companies getting taken private, and if a PE fund is IPOing a portco, they will want to at least make their money back otherwise they would hold onto ownership until market conditions improve.
Interesting debate, but at the end of the day, the true "value" of anything is the price that someone will pay for it.
Wow useless answer, could have just said "it depends"
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