What is a liquidity discount?
When valuing unlisted shares, one of the main differences compared to listed shares is the lack of an active market where shares can be sold overnight. Because a buyer takes a risk by tying up capital for an unclear period, this risk is priced into the valuation via a "liquidity discount" (or illiquidity discount).
How large is the discount?
The discount varies depending on the company's size, maturity, and how close a potential exit event (such as an IPO or a buyout) is. Historically and theoretically, the liquidity discount is usually assessed to be somewhere between 15% and 30% compared to a similar public company.
- Early stage: Higher discount, as the risk is greater and a future exit is far away.
- Pre-IPO: Lower discount, since a concrete and imminent path to liquidity exists.
Why is this important to know?
For investors, the liquidity discount is often part of the attraction of unlisted investments — it provides an opportunity to buy in "cheaper" than what the company would be valued at on the public market. For sellers or founders, however, it means dealing with a lower valuation compared to what public market multiples would imply.
Summary
A liquidity discount is the reduction in value (or price adjustment) that reflects the difficulty of quickly converting an unlisted share into cash without having to significantly lower the asking price to find a counterparty.