Why are private market multiples typically higher than public market multiples?

• A. Public companies have more readily available information and are traded at more efficient prices, while private deals are often driven up by opportunities to create value and by competitive bidding.
• B. Private market multiples are always higher due to illiquidity.
• C. Public comps always yield higher multiples than private deals.
• D. Multiples are determined purely by growth rate.

Answer: (A)

The main idea is that price multiples reflect both expected returns and the costs or benefits of liquidity and information. Public markets are highly liquid and have broad, transparent information, so prices tend to be more efficient and conservative relative to what private buyers are willing to pay. In private deals, buyers face illiquidity and information gaps, so they demand a premium to lock up capital and to cover the risks of undisclosed issues. At the same time, private equity buyers often seek to create value through operational improvements and strategic add-ons, and when multiple bidders compete in an auction, that competition can push purchase prices up. All of this combined tends to lift private market multiples above public ones. The option captures this contrast by pointing to better information and efficient pricing in public markets, versus value-creation opportunities and competitive bidding driving private prices higher. While illiquidity plays a role, calling it the sole reason is too absolute, and the other statements ignore the impact of competition and active value creation on private valuations.