A discount for lack of marketability (DLOM) reflects the reduced value attributable to an investor’s inability to readily convert an investment into cash. In simple terms, an investor will generally prefer an investment that can be sold quickly, at a transparent market price and with limited transaction costs, over an otherwise similar investment for which there is no readily available market.
A substantial body of valuation research has attempted to quantify this effect. Restricted-share studies have compared freely tradable listed shares with otherwise similar shares subject to trading restrictions, while pre-IPO studies have compared transactions in shares while companies were still private with prices achieved once those companies became publicly traded. These studies generally support the principle that reduced marketability can have a meaningful effect on value.
This principle also contributes to the broader difference between valuation multiples observed in listed and private markets. Listed shares typically benefit from an established market, transparent pricing and greater liquidity. Private-company shares usually do not have these characteristics, and reduced marketability can therefore be one of several factors contributing to the difference between multiples observed in listed markets and those applicable to private companies.
Capitec provides an interesting practical illustration of marketability from another perspective. Its share price has reached a level where purchasing even a relatively small number of shares represents a meaningful capital commitment for many retail investors. This does not mean that Capitec shares are illiquid in the conventional sense — they trade on an established listed market — but a very high nominal share price can nevertheless create a practical barrier to participation for smaller investors.
This raises the question of whether a stock split could improve accessibility. A stock split would not change Capitec’s underlying enterprise value, equity value or the proportional economic interest of existing shareholders. It would simply increase the number of shares while reducing the price per share proportionately. In doing so, it could make the shares more accessible to a broader group of investors and potentially enhance their marketability.
There is, however, an interesting flip side to the conventional liquidity argument. SpaceX provides an example of circumstances where a scarcity of shares available to investors around an IPO can help support a high IPO price. Where only a relatively small proportion of the company is made available and investor demand significantly exceeds that supply, buyers may compete for the limited stock being offered. In such circumstances, restricted liquidity does not necessarily result in a discount; scarcity can contribute to a higher price at which the shares are initially placed.
This does not invalidate the conventional DLOM principle. Rather, it illustrates that liquidity cannot be considered independently of supply, demand and the particular market in which a transaction occurs. The relationship between liquidity and value is therefore not always linear.
For private-company valuations, the circumstances surrounding the particular shareholding need to be understood. Marketability may be influenced by the size of the interest, the number of realistic potential buyers, transfer restrictions, rights of first refusal, shareholders’ agreement provisions and the practical period required to realise the investment. A smaller minority interest may also have limited influence over the company and may appeal to a narrower pool of potential purchasers, although lack of control should conceptually be distinguished from lack of marketability.
DLOM should therefore not be regarded as a mechanical percentage adjustment. The valuer ultimately needs to understand the actual market for the particular interest, and how liquidity, accessibility, scarcity, transferability and investor demand would influence the price that an informed buyer would be prepared to pay.