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What role do investment bankers play in the IPO process?
Press to flip
They handle pricing, selling the shares, and providing credibility to the issuing company.
How did Warren Buffett's investment strategy during the 2008 financial crisis reflect his attitude towards liquidity?
He was less concerned about liquidity, which allowed him to make significant investments during the financial crisis.
Why does a private company generally have a higher cost of equity compared to a public company?
Private business owners can't be as diversified as public investors, resulting in a higher cost of equity.
What are alternative methods to traditional IPOs and one controversial aspect of SPACs?
Alternative methods include Direct Listings and SPACs. SPACs are controversial due to the 20% promoter cut.
What is the main difference in concerns between private business owners and public investors?
Private business owners worry more about idiosyncratic risk because they can't achieve the same level of diversification as public investors.
How should essential individuals in a private business affect its valuation?
The value of the business might be adjusted downward if the operation heavily depends on essential personnel.
How can bid-ask spreads of public companies be used in private company valuation?
They can provide a more realistic estimate of illiquidity discounts compared to traditional methods.
What concept captures all risks, including idiosyncratic risks, for private business owners?
Total Beta.
Why is applying a flat discount for illiquidity considered flawed?
Because it doesn't account for factors like the company's profitability, the buyer's time horizon, cash constraints, and the crisis vs. non-crisis economic environment.
What issue commonly occurs with IPO pricing by investment bankers?
IPOs tend to be underpriced, leading to an average 15% jump on the first trading day.
What are the key steps in calculating the total beta for a private business?
Calculate the unlevered beta, adjust it for the correlation with the market, then lever the beta with the appropriate debt-to-equity ratio.
Why might a public company be considered the best buyer for a private company?
Because public companies have a lower cost of equity and improved liquidity.
What document is filed before an IPO and is key to the valuation process?
The Prospectus.
Who are the three types of potential buyers for a private company?
Private Owner, PE Fund, and Public Company.
What are the problems associated with traditional illiquidity discount studies based on restricted stocks and IPO prices?
They often suffer from selection biases.
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