Risk, illiquidity or marketability: What matters for the discounts on private equity placements?

Using a clean sample of private equity placements over the period of 1999 to 2012, we examine the determinants of the discounts on private placements. Classifying various determinants into three categories, namely risk, illiquidity, and marketability, we show that risk and marketability are significant determinants of the discount on private placements over the entire sample period. However, we identify a structural break in the relation between the discount on private placements with illiquidity and, to a lesser degree, marketability. Specifically, we find that liquidity is a more important determinant during the pre-2003 period, but marketability becomes a more important determinant during the post-2003 period. We attribute the structural break to substantial changes in market microstructure during our sample period. Lower transaction costs make illiquidity less of a concern for investors, whereas more active trading by investors calls for a higher discount for the lack of marketability.