There’s much in the deal-making world, especially at the mid-market level, that is based on the concept of buying at a private market valuation and selling at a public market valuation (hence the title of this post).

A private market valuation simply refers to the value placed on private businesses, while a public market valuation refers to the value placed on public businesses. In the private business world, multiples are often in the range of 2x to 5x EBIT. In the public (listed) business world, multiples are more like 5x to 20x EBITDA. Note the reference to EBIT and then EBITDA, which stretches the gap even wider.

For listed businesses, the theory is they can purchase a private business at say 5x EBIT and immediately their own public market multiple is applied. There could be an instant doubling or tripling of value (just on paper of course). This is why so many listed companies are opportunistic with regard to acquisitive growth; there’s this concept of instant upside without the need to integrate or realize synergies.

Of course, such strategies are the antithesis of long-term value proponents, but in good times, they can work to create significant shareholder value.  The same carries across to private equity. At the mid-market level, funds have access to businesses on private market valuations. Assuming they grow these businesses (usually through acquisition) to a size conducive to an IPO, they can effectively sell them on a public market valuation. If you apply this multiple uplift to the results of organic growth initiatives, the introduction of debt, increased efficiency, etc., you can see it can easily create the bulk of additional value.

With the current unpleasantness, you may actually find that public multiples have dropped much more than private multiples, which somewhat hampers the effectiveness of this strategy. But, cashed up funds can still take advantage of the private market now, implement their improvements and be ready to exit when the public market is back to its old irrational self.