What is a liquidity premium?
- Definition
- The liquidity premium is the additional return that investors expect to earn in exchange for holding an asset that cannot be easily or quickly converted to cash.
This premium exists across asset classes: investors typically expect long-term bonds to yield more than short-term bonds, private equity to return more than public equity, and private real estate to generate higher long-term returns than publicly traded REITs, in part because investors cannot sell their stakes on a daily basis. The practical implication for long-term investors is significant. For investors who genuinely do not need immediate access to their capital, and who have a time horizon measured in years rather than months, accepting some degree of illiquidity is not a burden but a structural advantage.
