The myth of the private company discount - New discoveries on the pricing of private companies in Sweden

Abstract

There are several factors that influence the pricing of private companies differently in comparison to listed companies. The most prominent of these factors is the lack of liquidity. Owners of private company stock cannot easily sell the stock on a ready market, as is the case for publicly trade stock. Several studies have confirmed that private companies sell at a discount relative to listed companies, namely the Private Company Discount (PCD). There are indications of a widespread use of a PCD in Sweden in the pricing of private companies, yet, there has never been a study that confirms the existence of a PCD on the Swedish market. The scope of this study is set to create an index on behalf of Ernst & Young, comparing the pricing of private companies with listed companies. Such a comparison enables the measurement and analysis of a PCD on the Swedish market. The results from this study are remarkable. The average discrepancies in pricing between listed and private companies are too small to be statistically significant. Although there are possible distortions in the study, it seems that the PCD was, for the period 2005 – 2008 Q3, much lower on the Swedish market than what is the general perception and use of the PCD. Moreover, although the study cannot prove the existence of a PCD over the whole four-year period, it can be proved for certain periods, namely in economic booms. This means that the PCD varies over the economic cycle. These discoveries turn the use of a standardized PCD inadequate – we argue for the use of a price index for future reference when applying a PCD on a private company’s value.