Most of the assets we value lack liquidity. Because they are illiquid, such assets typically sell at a discount from their market price.

But how much of a discount is appropriate? How does one determine the value of illiquid assets where no public market readily exists?

While many factors may figure into the selling price, the recent sale price of similar assets is especially important. Just as real estate agents use the selling price of other homes in a neighborhood to help determine the asking price of a home that is just going on the market, Pluris Valuation Advisors uses similar sales as a benchmark. And when valuing illiquid securities, the prices of other illiquid securities provide the best comparison.

That's why our proprietary LiquiStat database is so important. LiquiStat provides Pluris with comprehensive data from comparative real-world restricted securities transactions that can be used to generate, document and support an opinion of an illiquid asset's value. We have secured ongoing access to this data through an exclusive licensing arrangement with our affiliate, Restricted Stock Partners.

The LiquiStat database is a powerful analysis tool that plays an important role in the valuation process and provides us with a resource that's not available to other valuation firms.

The LiquiStat database already includes more than 1,000 transactions, which is significantly more than the number used in most restricted stock studies. With about a dozen transactions being added each month, the database is growing rapidly.

Restricted Stock. The LiquiStat database has been analyzed by Pluris and the conclusions from this analysis are incorporated in our valuation work. For Portfolio Valuation work and other valuations, the research shows that restricted stock discounts are a function of the variance of the stock, the block size valued, the trading price in the market, and the remaining illiquidity period. These conclusions will be updated as more data are added to LiquiStat.

Warrants. The data shows that warrants trade at significant discounts from their Black-Scholes model values -- much greater discounts than those for restricted stock. The discounts are a function of the variance of the stock, the delta of the warrant, a measure of how far the warrant is into or out of the money, the block size, the market value of the issuing firm, and other factors. These conclusions will also be updated as the LiquiStat database grows.

Convertible Securities. The LiquiStat database also shows significant trading activity on the Restricted Securities Trading Network (RSTN) in convertible debentures and convertible preferred shares. This data, along with the LiquiStat database, helps us determine the appropriate option-adjusted yield spreads for convertible securities. The analysis should always consider the price the convertible instruments are issued at, as well as the warrant coverage and the percentage of the total purchase price that is represented by the warrant coverage.

LiquiStat_PIPEs™ Database

The LiquiStat database incorporates a study of PIPE (Private Investments in Public Equity) transactions compiled by Pluris, as well as private transactions in restricted stock, warrants and convertible securities that take place between investors using the Restricted Securities Trading Network (RSTN).

The discounts (or yield spreads) in PIPE deals are determined net of warrant coverage, which is a major part of many PIPEs. Because of this, any analysis of illiquidity discounts for private placements is inadequate and misleading without proper data on the fair value of the warrants issued. Because of our LiquiStat database on warrant transactions, Pluris is in a unique position to calculate the impact of warrants on PIPE values.

LiquiStat_ARS™ Database

Pluris has also recently begun compiling data on buy-interests, sell-interests and transactions in auction-rate securities. Such securities, once their auctions have failed, typically yield the so-called “maximum rate,” also known as the “penalty rate.”

However, penalty rates are often set low, reflecting the commonly held belief when the securities were issued that ARS auctions were extremely unlikely to fail. Securities that lack the liquidity of cash-equivalent securities, but carry “cash” interests rates, virtually always sell at a discount. The discounts vary based on how long the auctions are expected to continue failing, the credit quality of the issuer, the magnitude of the penalty rate and other factors.

Click here to view the LiquiStat white paper

Check back frequently. Additional information about this ground-breaking database, which includes transactions for restricted stock, warrants and convertible securities, will be posted soon. Our Press Room, in particular, features new articles, studies, white papers and other information as it becomes available.

For more information on how the LiquiStat database can help you and your clients, please e-mail us.