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Jul 1, 2011 12:00 PM
Should Substantial Discounts Apply to Very Short Holding Periods?
A look at recent private placement transactions suggests the answer is “yes”
What factors impact marketability discounts in restricted stock transactions? Typically, an investor's expected holding period is the primary determinant of the size of the marketability discount. But the regulations governing restricted stock have eased significantly since 1990. Effective Feb. 15, 2008, the minimum holding period was reduced from one year to six months. Our firm, Stout Risius Ross (SRR) studied this shorter holding period to quantify how this change impacts discounts as well as to analyze the effect of certain company-specific factors on discounts.
We think that a discount study involving short holding periods is useful in the context of valuing closely held minority interests in which a liquidity event is imminent, such as a sale of the company or a pending initial public offering. Similarly, our study may be relevant in estimating discounts applicable in valuing hedge fund interests with short holding periods. Often, once the initial lockup period is satisfied, hedge funds maintain notice periods that limit redemptions to certain time intervals, such as quarterly or semiannually, during which period of time the investor is subject to market risk. Despite these short holding periods, empirical evidence suggests substantial discounts may be warranted.
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| Estate Tax | Donor Advised Funds |
| GSTs | Family Offices |
| Private Foundations | Life Insurance |
| 2010 Tax Act News | Industry Trends Surveys |
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