The marketability discount in valuation multiples of South Africa's private equity market

Abstract

The aim of this research is to give the South African private markets industry guidance on how to think of the marketability discount as well as give an equation to ensure that the discount is calculated with similar rules. The use of a standard and fair marketability discount would avoid erroneous equity valuation conclusions, and thus provide more accuracy to investment decisions than is currently the case. the aim of the research is to analyse the behaviour of the marketability discount given the size of the enterprise. The aim is to build a model that introduces variables that capture size, profitability, and risk. In this way, the marketability discount, MD, can be isolated by checking, at the same time, the impact of the rest of the variables in each EV ratio. The valuation methodology applied in this paper was 32 emerging market transactions between 2003 and 2023. This research reiterates the importance of removing subjectivity in investment decisions to quantify risk accurately which results in reliable investment returns.