Page "Arbitrage" Paragraph 58

The market prices for privately held companies are typically viewed from a return on investment perspective ( such as 25 %), whilst publicly held and or exchange listed companies trade on a Price to earnings ratio ( P / E ) ( such as a P / E of 10, which equates to a 10 % ROI ).

Thus, if a publicly traded company specialises in the acquisition of privately held companies, from a per-share perspective there is a gain with every acquisition that falls within these guidelines.

Exempli gratia, Berkshire-Hathaway.

A hedge fund that is an example of this type of arbitrage is Greenridge Capital, which acts as an angel investor retaining equity in private companies which are in the process of becoming publicly traded, buying in the private market and later selling in the public market.

Private to public equities arbitrage is a term which can arguably be applied to investment banking in general.

Private markets to public markets differences may also help explain the overnight windfall gains enjoyed by principals of companies that just did an initial public offering ( IPO ).