No-arbitrage Private Market Equity Prices and Transaction Costs: Generalized IPCPL Theory and Private Market Empirical Tests

Abstract

Implied private company pricing line theory (IPCPL theory) is based on the fundamental assumption — taken from modern asset pricing theory — that no arbitrage opportunities exist between pricing of privately- and publicly-held equity. More specifically, IPCPL theory is based on the assumption that no arbitrage opportunities exist resulting from differences in equity sale transaction costs across private and public equity markets, while holding risk exposures and sensitivities constant. This study generalizes IPCPL theory to explain and predict the relationship between equity prices set under conditions where equity transaction costs differ across any market setting — including differences both within and across private and public markets — and then presents preliminary empirical evidence from private capital market data that is largely consistent with the theory.