The Illiquidity Premium: What Private Markets Really Promise

Anyone exploring private markets encounters the concept quickly: the illiquidity premium. It underpins the investment case for private equity, private debt, infrastructure, and real estate – and it explains why these asset classes operate fundamentally differently from a publicly traded fund or ETF. This article breaks down what the premium actually means, what it can realistically deliver, and where its limits lie.

Liquidity Has Value – and a Price

With a standard open-ended fund, you can typically redeem your units on any trading day. While a listed share can be sold within seconds, selling a stake in a private company, a real estate asset, or an infrastructure project often takes months or even years. That restricted tradability is not a technical oversight – it is structural. Unlisted assets have no continuous stream of buyers and sellers like a stock exchange.

This constraint carries a price tag – and that is precisely what the illiquidity premium describes. In the world of capital markets, the illiquidity premium refers to the expected excess return that an illiquid investment earns compared to a liquid investment with otherwise identical characteristics. It compensates investors for restricted tradability and for the willingness to tie up capital over an extended period.

Put differently: investors who accept that their capital will be locked up for several years, with no option to sell at short notice, expect to be rewarded with a higher return. To convince an investor to forgo that advantage and commit capital for the long term, a financial incentive must be offered. That incentive is the higher expected return known as the illiquidity premium.

How Much Premium Is Realistic?

The illiquidity premium is not a fixed interest rate known in advance – it is an expectation. Estimates vary across asset classes and market cycles. Historically, US private equity buyouts have outperformed public small-cap equity benchmarks by roughly 2.3% to 4.3% per year (Russell 2000 index, 1986–2017). For other asset classes such as private debt or infrastructure, expectations tend to be more moderate.

Crucially: the illiquidity premium is not a guaranteed excess return, but rather compensation for taking on a specific risk – the sacrifice of liquidity. Whether, and to what extent, it materialises depends on the fund manager, entry timing, asset class, and market environment.

This matters particularly in the ELTIF space: because ELTIFs are typically designed for long holding periods, one would expect an illiquidity premium – effectively compensation for the risk that ELTIFs cannot be sold quickly and without a significant price discount. Whether investors in ELTIFs are actually receiving that premium remains difficult to verify conclusively from available historical data, given how young the market is.

What Illiquidity Looks Like in Practice

Capital lock-up is not an abstract concept – it has real-world consequences. Liquidity data from the myELTIF database illustrates this clearly: the average lock-up period across the funds listed on myELTIF – meaning the minimum window during which no redemption is possible at all – stands at roughly 21 months. The median notice period is just over 62 days. To make these differences easier to compare, myELTIF's fund comparison page now includes a dedicated filter for liquidity characteristics – lock-up period, notice period, redemption frequency, and gates – so investors can screen funds directly against their own liquidity needs.

After the lock-up ends, redemptions are mostly restricted to fixed windows: of the 60 funds analysed, 37 offer only quarterly redemption opportunities. On top of that, gates can apply – caps on the total volume of redemptions accepted in any given period. In stress scenarios, this can mean that not all of a desired redemption can be processed immediately.

A concrete illustration: an investor entering an ELTIF with an 18-month lock-up and quarterly redemption windows cannot even submit a redemption request until after a year and a half – and even then, only at the next quarterly cut-off date. That is fundamentally different from an ETF.

Why Institutional Investors Take the Illiquidity Premium Seriously

Institutional allocations to private markets have reached a new high. According to the Aviva Investors Private Markets Study 2026, the average portfolio share of this asset class has climbed to 12.5% – a record since the survey began eight years ago. And their motivations have shifted: while diversification remains the most frequently cited reason at 76%, the importance of the illiquidity premium has grown dramatically – 55% of investors now consider it a key driver, up from 25% in 2023.

For retail investors accessing these asset classes through ELTIFs for the first time, the same underlying logic applies – with one important caveat: long capital commitments, limited transparency, and valuation uncertainty demand professionalism, discipline, and a long investment horizon. The illiquidity premium is a structural possibility, not an automatic outcome – and it only makes sense for capital that can genuinely be set aside for the long term.

The Bottom Line

The illiquidity premium is the core principle behind private markets investing: committing capital for an extended period and accepting restricted access can, structurally, yield higher expected returns – without guarantee, but with sound economic logic. For investors, this means one thing above all: before entering an ELTIF or any other private markets structure, your own liquidity needs must be clearly mapped out. The premium only works if the lock-up is genuinely manageable.

This article is for informational purposes only and does not constitute investment advice or a recommendation to invest.