This article explores the key differences that can arise between listed and unlisted valuations, and the strengths and weaknesses of each methodology, taken from the viewpoint of someone who has worked on both sides of the fence.

Unlisted valuations are receiving increasing regulatory attention in Australia, with some outspoken market observers having labeled unlisted valuation practices as ‘dodgy’, while others continue to promote the methodology as superior to listed market valuations, which can be ‘irrational’ at times.

While discounted cash flow (DCF) methodologies may typically be used to value both listed and unlisted companies, significant differences can arise in the timing of updating cash flow forecasts and underlying assumptions, and performing the valuation cross-check, which can impact the valuation outcome.

Valuing unlisted companies involves additional complexities and challenges given the lack of transparent market prices found in publicly traded firms, while data on peer companies may also be scarce.

Compounding these issues, valuation outcomes may further be impacted by biases of the valuers that perform unlisted valuations, which can include: not undertaking necessary rework leading to out of date forecasts or discount rate assumptions, behavioural biases such as overconfidence or anchoring, sudden changes of valuation methodology, asymmetrical treatment of good vs. bad news and valuation ‘smoothing’.

A professional valuer is to remain independent of their client, but the lack of effective controls and oversight at some organisations can lead to unlisted valuations being unduly influenced by the interests of key stakeholders. This is one of the reasons behind the increased focus from regulators.

This article emphasises the need for transparency and consistency in valuation practices, and highlights key issues and potential biases to look for when reviewing unlisted valuation reports.

Click here for the full article by Martin Spiewak.