January 30, 2020
In all developed countries – and in particular in US and UK – the number of listed companies is declining since many years. At the same time, the number of private equity (PE) backed companies is increasing. Similarly, the PE backed net asset value is growing much faster than public market capitalization.
The various reasons why companies seek public or private equity are presented in a recent white paper by René M. Stulz, Ohio State University, Fisher College of Business (“Public vs Private Equity”, Nov 2019, download here).
One of the major reasons identified by Professor Stulz to seek private equity is the changing firm characteristics requiring higher investments in intangible assets. Often, private equity investors have specialized knowledge that enables them to better understand the business model of young firms. Passive public equity investors often have problems to understand the risk profiles of intangible investments. This involves both business plan projections, and eventual collaterals. Therefore, it is often costly and complex for young firms to explain their business to the public market.
The valuation community is required to support this trend with robust valuations of intangible assets on all levels – including financial reporting, pre-deal, taxation and liquidation values. The value of goodwill plays a particularly important role for young, intangible-rich firms.