The Price of Waiting: Understanding the Illiquidity Premium

Illustrated by Mara Chintea

In 2026, 55 per cent of institutional investors named the illiquidity premium as a primary reason they allocate money towards private market investments, up from just 25 per cent in 2023 (Aviva Investors Private Markets 2026 Study). In 2023, global private capital assets under management were $13.1 trillion USD; in 2025, that number rose to $24 trillion USD (McKinsey Private Markets Report 2024 and 2026). Behind both figures sits the same idea. Investors are increasingly comfortable locking up their money, provided they are compensated for doing so. That compensation has a name: the illiquidity premium. Understanding it explains this immense growth in private markets. 

What Investors Are Actually Being Paid For

Academic finance research offers a more precise definition of the illiquidity premium and how it is to be interpreted. According to a Wharton School discussion of research by Choi, Han, Shin, and Yoon, the condensed explanation of the liquidity premium is that liquid assets are simply worth more because they can be sold easily. Their model refines this, explaining that in ordinary market conditions, it is the buyer who is indifferent between a liquid and illiquid asset. Therefore, the buyer requires a discount on the illiquid one to compensate for an eventual, delayed resale. This discount is what generates the return investors come to call the illiquidity premium. During market distress, however, the relationship reverses. It is the seller who becomes the indifferent party, and illiquid assets must then sell at a premium because sellers, not buyers, require compensation for the delay (Wang, Wharton School). 

The most direct environment for this illiquidity premium is private markets. However, private markets are not one asset class but several, each displaying its own version of the premium through a different mechanism. The most prominent is private equity. Private equity funds typically take controlling or majority stakes in portfolio companies, giving managers years rather than quarters to restructure operations before an exit. Private credit funds, however, operate slightly differently. They lend directly to businesses that can no longer access the same volume of bank financing they once could, capturing a premium for underwriting risk that banks became less willing or able to take. Finally, private infrastructure and real estate funds hold physical, slow-moving assets, typically financed with capital committed for a decade or longer to match the asset’s own timeline. The mechanism varies by asset class, but the underlying philosophy does not. Capital is locked up for long periods of time, and in exchange, the investor is compensated for giving up the option to exit whenever they choose (McKinsey Private Markets Report 2026).

The Room 2008 Left Open

The scale private markets have reached is, in part, a legacy of the 2008 financial crisis. In 2005, IMF Chief Economist Raghuram Rajan warned that competitive pressure was pushing banks toward increasingly illiquid transactions, a warning that looked prescient once the crisis hit three years later (Has Financial Development Made the World Riskier?). The regulatory response was significant. Basel III and the Dodd-Frank Act required banks to hold substantially more capital against leveraged and commercial loans, raising the cost of that lending considerably (Viral Acharya, NYU). The market’s needs for that credit did not disappear. Private credit funds, unencumbered by the same capital requirements, stepped into the space banks retreated from, while private equity continued expanding alongside them. What had been a niche subset of institutional portfolios became, over the following decade and a half, an industry worth $24 trillion USD (McKinsey Private Markets Report 2026).

Whose Money is Actually Locked Up

So whose capital is tied up in this environment? These investors are not, for the most part, wealthy individuals choosing to lock up disposable capital. They are pension funds, endowments, and insurance companies, managing money on behalf of people who have little say in how it is invested. In 2025, roughly 71 per cent of public pension funds allocated at least 10 per cent of their portfolios to private markets (Aviva Investors Private Markets 2026 Study). These institutions carry monthly, non-negotiable obligations to pensioners and policyholders, yet the assets meant to fund those obligations can take years to convert back into cash. The illiquidity premium, in this context, is not simply a return an institution earns. It represents compensation collected on behalf of millions of people who, by and large, never chose to accept this condition themselves.

The Premium in Action

The dynamics described above are not abstract, and are particularly evident in the buildout of AI infrastructure. In October 2025, Meta sold an 80% stake in its Hyperion data center project to the alternative asset manager Blue Owl Capital for approximately $2.5 billion USD. The resulting joint venture then raised $27 billion USD in debt, one of the largest investment-grade private financings on record (Reuters). Additionally, Apollo and Blackstone arranged a financing package of roughly $35 billion USD to Anthropic’s data center buildout (U.S. News and World Report). Private credit is now projected to supply more than half of the $1.5 trillion USD needed to fund American AI data center buildout through 2028 (Reuters). These deals lock in capital for years, often a decade or more, against collateral, chips and data center hardware, whose usable life is not guaranteed to last nearly as long. Whether that mismatch resolves smoothly or becomes the next chapter in illiquidity’s cost is not yet known, but is exactly the kind of bet the illiquidity premium exists to price.

Easing the Mismatch

Alternative asset managers, firms that deal with this illiquid environment, such as Ares, Apollo and Blackstone, have not left this liquidity mismatch unmanaged. Secondary markets, where an investor sells an existing stake in a fund to another buyer rather than waiting for the fund itself to return capital, have grown into a critical tool. Net asset value lending works differently. Instead of an investor exiting early, the fund borrows against the value of its own holdings, generating cash without selling a single asset. Both NAV lending and secondary markets ease the burden of illiquidity and provide alternative asset managers with short-term, ad-hoc solutions to a long term problem. Both have imperfections, however, as secondaries often require a discount on the sale price and NAV loans require paid interest for the borrowed money (Baker, UPenn Law).

The illiquidity premium, then, is less a fixed feature of private markets than a price. Secondaries and NAV lending can soften the wait, but ultimately do not remove it. That matters given whose capital is involved. Much of the $24 trillion USD now held in private markets belongs, indirectly, to pensioners who never chose this trade themselves. For them, the illiquidity premium is the quiet reason their money moves slowly, in an exchange their managers are counting on.