Illiquidity Premium
Private Credit glossary · Market, Sourcing & Sponsor Dynamics
Definition
Excess yield earned for holding assets without a liquid secondary market — the LP cannot exit at par on demand and must hold to maturity (or wait for prepayment). For US middle-market direct loans, the estimated illiquidity premium is 150–250 bps over comparable broadly syndicated loans, and roughly 250–400 bps over investment-grade bonds. The premium is partly a structural illiquidity rent (lenders earn it for capital lockup) and partly compensation for the bilateral-information asymmetry inherent in private debt.
Illiquidity Premium in plain English
Some investments you can sell in seconds (like a popular stock); others trap your money for years because there's no easy buyer. The illiquidity premium is the extra yearly return you demand for accepting that trap — for agreeing to lock your cash up and wait, rather than being able to cash out whenever you want. It's like getting a higher interest rate on a savings account precisely because you promised not to touch the money for five years. For these private middle-market loans, that bonus is roughly 1.5%–2.5% more than easier-to-trade loans, and it pays you both for the lockup itself and for the risk that the borrower knows more about their own business than you do.
Practice Illiquidity Premium
The 'Illiquidity Premium' in private debt refers to which of the following?
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