LinkedIn IPO: the Public Premium


Facebook has been leading a cult of companies avoiding IPOs.  The claim is that the cost of regulation and transparency is unnecessary and inefficient.  Private markets like Second Market have grown tremendously.  This may be all wrong, and let’s hope so.

The IPO of LinkedIn demonstrated a public premium: public markets offered a higher valuation than the private markets did.   Valuations can be higher because discount rates are lower.  Think about it: public investors get maybe 15% in a strong year.  Private Equity investors are organized around discount rates of 20% or higher.    If your discount rate is so high, future profits are simply not worth as much.

There is another important reason for a public premium: regulated standards of conduct and transparency.  When owners (shareholders) are more informed and confident, risk is reduced and value goes up.

The reason to hope this is the case is for the public good.  If IPOs and public listings are shown to be a rational — because the cost of compliance is less than the valuation premium — then more companies will be public and capitalism will be more broadly accessible. Also, this will lead to higher overall investment rates and stronger economic growth.

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