Does private equity capitalize on multiples disparities? Researching the edge in private vs. public enterprises’ acquisitions.

Over the past decades, private equity has provided the opportunity to passively participate in investments in unlisted markets, witnessing exponential growth in its popularity and establishing itself as a new asset class that cannot be ignored in the portfolios of institutional investors or those with considerable capital. From a business point of view, it provided a valuable form of debt financing, due to the benefits of debt especially mentioned by the Modigliani-Miller, trade-off and pecking order theories, which made it more attractive, in some cases, than other debt sources. Investors allocating resources in public equity markets purchase securities from listed companies that price their fundamentals based on multiples established in market trading. In private markets, less trading takes place than in public markets, and for this reason, an illiquidity discount is applied to the value of shares in private companies. This discount may not always justify the differences in pricing between shares of listed and unlisted companies. The purpose of this research is to collect, analyze, and compare the valuation ratios of Italian unlisted companies with the alternatives that publicly listed markets offer worldwide, in order to examine possible differences in valuation ratios. These differences might suggest different pricing for shares of companies with similar fundamentals, depending on the market in which they are traded. Private equity funds could benefit from more favorable multiples by trading in private markets to outperform reference markets. In the case of consistent results, the analysis will highlight the impact on added value creation through access to broader strategic skills and resources shared by private equity funds. The multiples for unlisted companies will be determined by calculating a possible acquisition price of the company, divided by the main financial metrics available in the balance sheet. For listed companies, the equity value available from market data will be divided by the same financial metrics. Data analysis and discussion of the results will follow.