Page 38 - FINAL CFA II SLIDES JUNE 2019 DAY 8

LOS 33.a: Compare public and private READING 33: PRIVATE COMPANY VALUATION
company valuation.
MODULE 33.1: PRIVATE COMPANY BASICS
Company-Specific Factors –for private companies:

Stage of lifecycle: Private companies are typically less mature than public firms -valuation will vary with the lifecycle stage.

Size: Private firms typically have less capital, fewer assets, and fewer employees and riskier (valued at greater risk premiums).

Quality and depth of management: Smaller private struggle to attract, this slows growth and increases risk.

Management/shareholder overlap: More so for private firms and hence more longer-term perspective, low/high risk.

Short-term investors: Level and consistency of quarterly earnings causes more short-termism for public firms.

Quality of financial and other information: Private firms has less disclosure pressures hence greater uncertainty/risk premium.

Taxes: Private firms may be more concerned with taxes due to the impact of taxes on private equity owners/managers.

Stock-Specific Factors –for private companies:

Liquidity: Private company equity has fewer potential owners and less liquid, thus a liquidity discount is applied.

Restrictions on marketability: Moore so for private companies than public companies, discount applied!

Concentration of control: More so in private firm which may lead to greater perquisites at the expense of minority shareholders.

Overall, company-specific factors can have positive or negative effects on private company valuations, whereas stock-specific
factors are usually a negative!