Liquidity premium

The additional expected return an investor should require for holding something that cannot readily be sold.

Example

Requiring 11.00% a year from a ten-year illiquid vehicle where a liquid alternative is expected to compound at 8.00%.

Important

It is what you should demand, not what any vehicle will deliver. Higher fees, an extended term and capital that sits uncalled each consume it before it reaches you.

Related terms

• Illiquidity discount — The reduction in price a seller must accept to find a buyer for something that cannot be readily traded.
• Committed capital — The total amount an investor has contractually agreed to provide to a fund, whether or not it has yet been called.
• Liquidity — How quickly and cheaply an asset can be converted to cash without moving its own price.

Lessons that explain it

• A price is a guess between two auction estimates until a hammer actually falls — There is no continuous market here - only comparable sales, an appraiser's estimate, and an auction reserve that can fail to be met. The gap between what an item is 'worth' and what it actually sells for can be wide, and it is measured only at the moment of an actual transaction. (12 min)
• The liquidity premium, and the three ways it fails to arrive — Illiquidity is supposed to pay you extra. Sometimes it does. Here is how to check whether the premium you were promised actually reached you. (14 min)

All 578 terms in the Investing glossary