What is an illiquidity premium?
An illiquidity premium is an additional return that investors may receive in compensation for holding an illiquid asset. An illiquid asset generally cannot be easily bought or sold, so they tend to have longer lock-up periods and lower trading volumes compared to more liquid assets. Examples of illiquid assets include private equity, real estate, venture capital, fine wine, and more.
The illiquidity premium is essentially consideration for the higher risk associated with the asset being unavailable for sale. It reflects the opportunity cost of having capital tied up in an illiquid asset that cannot be quickly converted to cash if necessary.