Why might a private company apply a discount to public company comparables?

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A private company might apply a discount to public company comparables primarily because of the lack of liquidity that is inherent in private company shares. Public companies have their shares traded on stock exchanges, meaning that investors can easily buy and sell these shares, providing liquidity. In contrast, private companies do not have readily available market for their shares, which can make it more difficult for an investor to sell their investment or realize its value.

This lack of liquidity means that investors might require a higher return for investing in a private company, reflecting the additional risk associated with being unable to quickly convert their investment into cash. Thus, when comparing the valuations of private companies to public company comparables, it’s common to apply a discount to account for this lack of liquidity and the potential risk that investors face.