Public Market vs. Private Market Valuations: Is the Liquidity Premium Dead?

Joanna Glasner and I came to an interesting conclusion while reporting a story for the Venture Capital Journal about late stage investing in downward spiraling market conditions.

We’ve been hearing that late stage private companies are getting higher valuations from venture capitalists than comparable companies are getting from the public markets.

There are two schools of thought as to why this is: (A) the VCs doing these deals are wiser than the crowd, probably due to some specific insight into a company’s particular situation or some insight into when the market will rebound (B) the VCs are supporting exorbitant valuations to protect their investments.

Whatever the cause, the effect isn’t going to be pretty. If going public means taking a valuation discount, there won’t be any IPOs. Similarly, would-be strategic buyers are apt to consider internal development or a public market acquisition rather than pay a premium for private companies.

There are plenty of academic papers which estimate the expected discount an illiquid company should have when compared to a liquid company. Economists have been working to figure this out for years and this era in venture capital financing may be a rich counter-example worthy of study.