What are the main challenges of using comparable transactions in emerging markets?

1 Data availability

One of the biggest challenges of using comps in emerging markets is the lack of data availability. Emerging markets may have fewer transactions, lower disclosure standards, and less reliable sources of information than developed markets. This can make it hard to find relevant and comparable deals, as well as to obtain reliable financial and operational data of the target and the peers. Moreover, data availability may vary across different regions, sectors, and time periods, creating inconsistencies and gaps in the analysis.

3 Market efficiency

A third challenge of using comps in emerging markets is the market efficiency. Market efficiency refers to how well the market prices reflect the true value of the assets. In developed markets, market efficiency is generally high, meaning that the market prices are close to the intrinsic value of the assets. However, in emerging markets, market efficiency may be low, meaning that the market prices may deviate significantly from the intrinsic value of the assets. This can be due to factors such as information asymmetry, market illiquidity, political instability, currency fluctuations, and investor sentiment. Therefore, using comps in emerging markets may not capture the true value of the target and the peers.

4 Industry structure

A fourth challenge of using comps in emerging markets is the industry structure. Industry structure refers to how the industry is organized, such as the number and size of the competitors, the degree of concentration, the barriers to entry, and the level of innovation. In developed markets, industry structure is generally stable and mature, meaning that the competitors are similar and well-established, and the industry dynamics are predictable. However, in emerging markets, industry structure may be dynamic and evolving, meaning that the competitors are diverse and emerging, and the industry dynamics are changing. Therefore, using comps in emerging markets may not reflect the current and future competitive advantage of the target and the peers.

5 Valuation adjustments

A fifth challenge of using comps in emerging markets is the valuation adjustments. Valuation adjustments are modifications that are made to the valuation multiples or the enterprise value to account for differences or anomalies between the target and the peers. In developed markets, valuation adjustments are relatively straightforward and standard, such as adjusting for non-recurring items, different capital structures, or different growth rates. However, in emerging markets, valuation adjustments may be more complex and subjective, such as adjusting for different risk profiles, different economic conditions, or different strategic factors. Therefore, using comps in emerging markets may require more judgment and expertise to make appropriate and consistent valuation adjustments.

6 Valuation alternatives

A sixth challenge of using comps in emerging markets is the valuation alternatives. Valuation alternatives are other methods of company valuation that may be more suitable or reliable than comps in certain situations. In developed markets, comps are often considered as a primary or secondary method of valuation, along with other methods such as discounted cash flow (DCF), market approach, or asset-based approach. However, in emerging markets, comps may not be the best or only method of valuation, depending on the availability, quality, efficiency, structure, and adjustments of the data. Therefore, using comps in emerging markets may require comparing and contrasting with other valuation methods to validate and corroborate the results.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?