PT - JOURNAL ARTICLE AU - Stillian Ghaidarov TI - Price Discounts for Unlisted Equity Securities with Random or Indefinite Liquidity Horizons AID - 10.3905/joi.2021.1.171 DP - 2021 Feb 19 TA - The Journal of Investing PG - joi.2021.1.171 4099 - https://pm-research.com/content/early/2021/02/19/joi.2021.1.171.short 4100 - https://pm-research.com/content/early/2021/02/19/joi.2021.1.171.full AB - Illiquidity discounts for restricted stocks depend on the contractual length of the restriction period. The author provides a methodology for extending the application of restricted stock discount models to situations where trading restrictions are stochastic or perpetual. By viewing a private equity investment as a portfolio of restricted equity strips representing claims on the future cash flows in perpetuity, the author obtains a converging upper bound for the illiquidity discount of an unlisted equity security with a random or indefinite liquidity horizon. The model introduces a simple and robust approach for quantifying illiquidity discounts for private equity investments which is of practical importance to valuation consultants, regulators, and risk managers.TOPICS: Security Analysis and Valuation, private equity, quantitative methodsKey Findings▪ Illiquidity discounts depend on the length of the trading restriction period. Existing theoretical restricted stock discount models are adapted to situations in which the trading restriction period has a well-defined fixed length.▪ In many scenarios, the private equity investor faces a liquidity horizon that may be random or indefinite rather than of known fixed length.▪ The investment’s equity duration provides the missing link that allows us to extend the use of restricted stock discount models to scenarios in which the trading restriction period is stochastically distributed or perpetual.