The Private Company Discount… or Premium?

Abstract

The main purpose of this study was to update and measure the private company discount. We chose to use the valuation multiples transaction method to compare 1,759 private company transaction multiples from the database PrivCo, 496 private company transaction multiples from the database SDC and 1,842 public company transaction multiples from the database SDC. We chose to look at four-year period from 2014-2018 and to use the valuation multiple Enterprise Value/Revenue (“EV/R”). We compared the mean EV/R valuations from the PrivCo and SDC Private Company datasets to the SDC Public Company dataset and found statistically significant (with an alpha of .05 and H₀ = mean difference of zero) premiums of 7.60% and 24.42%, between the PrivCo versus SDC Public data and between the SDC Private versus SDC Public data, respectively. We also looked at the trends of the means and medians for all three datasets but found no compelling arguments to be made from this period. Finally, by breaking down the classification of buyers, we found that there was a larger premium amongst the strategic private and public buyers versus the financial buyers. We believe the main reason we found a premium instead of the traditional discount could be due to the multiple or time frame that we used. We also believe that the finding could suggest a change in investor sentiment to favor private transactions or the premium could be a result of the increased capital within the private market, however, we do not have empirical evidence to fully support these beliefs at this time.