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The private equity discount: an empirical examination of the exit of venture backed companies

One of the main problems for investors in private equity is the lack of transparency. How can private companies be valued? What are the risk and return characteristics of private equity investments? In a study of financing rounds spanning 20 years from 1980 to 2000, Sanjiv R Das, Murali Jagannathan and Atulya Sarin of Santa Clara University and SUNY shed some light on the matter.

Through their empirical study, the authors discovered that the probability of an exit via IPO is roughly 20 to 25 per cent, that an exit via an acquisition is around 10 to 20 per cent, with the overall probability of exit increasing with the move from early to late stage companies. They also found that the exit multiples for acquired firms were much lower than the multiples for IPOs over the same time period.

Copyright © 2002 Sanjiv Das, Murali Jagannathan, Atulya Sarin

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Sanjiv Das and Atulya Sarin are at Santa Clara University, and Murali Jagannathan is at SUNY, Binghamton. For further information, please visit the Social Science Research Network at www.ssrn.com.