Can you predict a 58% DLOM based on new data in the FMV Restricted Stock Study?


In 1993, the Chicago Board Options Exchange began to publish its volatility index, which has become known as the VIX. The VIX represents the implied volatility of 30-day options on the Standard & Poor¹s 500 stocks. While the VIX comparison with restricted stock transactions suggests that the discount for lack of marketability should be substantially higher during the Fall of 2008, do the actual restricted stock transactions in the FMV DLOM database in 2008 support that hypothesis? Lance Hall of FMV says "yes."

During 2008, there were 118 restricted stock transactions from which information was available to determine discounts. Almost all of these transactions included registration rights. Registration rights ranged from 30-day to 45-day registration periods. Accordingly, one would expect these discounts to be very low relative to private equity. The average discount for all 118 transactions was 9.6%.

In the first half of 2008, 72 transactions were completed with an average discount of 8.5%. However, in the second half of 2008, 46 transactions were completed with an average discount of 14% (a 64.7% increase from the first half of 2008). In the first half of 2008, the average VIX was 23.4, while the second-half VIX was 41.9, an increase of 79.1%. As the VIX in the first half of 2008 was similar to the highest quintile VIX in The FMV Study, this suggests that a ³normal² private equity discount of 30% should be 35% during the first half of 2008. Then, because of the dramatic increase in the VIX in the second half of 2008, the data suggest discounts should be approximately 65% higher. Applying a 65% premium to a 35% discount suggests a discount for lack of marketability for a private company is approximately 58% in the second half of 2008. A discount of 58% is at the high end of the 45 to 60% discount range predicted by the historical restricted tock relationship to the VIX.


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