Public Markets and Private Values

Key Takeaways

• Public market trends shape private valuations — not directly, but by influencing perceived risk, buyer behavior, and discount rates.

• Economic uncertainty drives caution — investors, lenders, and buyers become more conservative, limiting capital and delaying deals.

• Temporary market swings vs. long-term shifts — understanding the difference is crucial to interpreting valuation impacts.

• Ongoing value monitoring is essential — regular tracking gives private companies the insight needed to adapt, invest wisely, and make strategic decisions.

Assessing Private Company Value in Volatile Markets

When assessing the value of privately held companies, we often look to publicly traded companies to serve as a benchmark for closely held companies within the same industry. Given the current economic uncertainty, how can we expect volatility in the public markets to affect the value of private companies?

The Influence of Public Markets on Private Valuations

Public markets are often seen as an indicator of the broader economic outlook. When investor confidence is high, stock prices tend to rise, reflecting optimism about future growth and profitability. Conversely, when there is uncertainty, the public markets can quickly become volatile, triggering stock price declines. The overarching effect on the value of private companies comes down to perceived risk, which can impact access to capital, behavior of buyers and sellers, and overall discount rates.

Increased Risk and Cautious Behavior

The perceived risk is greater in times of economic uncertainty and volatile markets. Companies and investors are often hesitant to make major moves and decisions when the economic environment is unsteady or in advance of impending unknown changes in legislation, tax law, and government administration and leadership.

• This increased risk makes lenders and investors more cautious, reducing the availability of capital and hindering growth opportunities for private companies.
• Sellers may hold out for higher valuations, hoping for a market rebound, while buyers become more hesitant, waiting for clearer economic signals. These shifts in buyer and seller behavior can lead to significant discrepancies in price expectations. Sellers who cannot delay sales will settle for a lower price than they otherwise might in a bullish economy.
• An increase in market volatility or perceived risk often drives up discount rates, as investors demand higher returns to compensate for uncertainty. As a result, even if a private company’s expectation of future profits remains unchanged, the perceived value by a buyer or investor may decrease due to the higher risk premium.

One critical distinction in assessing the effects of public market volatility is whether the market behavior is a temporary change or indicative of a fundamental shift. Public markets often overreact to short-term news or certain triggering events, leading to sharp corrections that don’t necessarily reflect the economy’s or industry’s long-term fundamentals. For instance, a temporary dip in stock prices might not impact a company’s intrinsic value much but could still influence short-term investment decisions and negotiations.

The Importance of Ongoing Value Tracking

These fluctuations in the overall market emphasize the importance of ongoing value tracking and management for your company. Having a benchmark for your company, in good times and bad, can aid in decision making regarding cost structure, investment opportunities, and incentive management.

While public markets don’t directly determine the intrinsic value of private companies, their influence on risk perceptions cannot be ignored. In times of uncertainty, private company valuations may be more impacted by shifts in the overall mood of the economy than by fundamental changes in the company’s performance or prospects. Companies that track and manage their value regularly will often have a clearer idea of how these uncertain and volatile times impact value and can make more informed decisions.