Illiquidity premium

The extra return paid for accepting that you cannot get out. It is a premium only to an investor who can genuinely sit through the lock-up.

Where you will meet it

Illiquidity premium appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Weigh the return potential and risks of private versus public market exposure within a long-term strategic allocation
  CFA Level III · Private Markets Pathway

  “Private markets can add an illiquidity premium, returns from manager skill and access to companies that are not listed.”

• Discuss the investment policy approaches adopted by institutional investors
  CFA Level III · Portfolio Construction

  “The endowment model allocates heavily to alternatives and active managers to exploit a long horizon and illiquidity premium, but demands strong governance and manager access.”

• Weigh risk and return across private equity strategies, and against other asset classes, when setting a strategic allocation
  CFA Level III · Private Markets Pathway

  “Model buyouts as levered public equity plus an illiquidity premium, and spread commitments across vintages.”

See also

Lock-up

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with I · Glossary