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Understanding the illiquidity premium

06/12/2017

The term ‘illiquidity premium’ has become synonymous with investing in private debt, but it is important investors fully understand what an illiquidity premium is in order to determine whether they are getting paid enough.

The years of ultra-low interest rates in Europe and the UK have created challenges for pension schemes, insurance companies and other institutional investors looking for reliable income streams and the returns needed to meet their objectives over the long term.

Institutional investors are looking beyond traditional sources of yield, turning to less liquid alternatives as an attractive way to access risk-adjusted returns. This has led to increased interest in private debt investments that could compensate an investor for factors such as their illiquidity and complexity.

If conventional wisdom holds true, investors can expect to earn a premium when investing in illiquid assets. In our latest Investment Insight, William Nicoll, co-head of Alternative Credit, looks at why investors may be compensated more for illiquidity and what the illiquidity premium really is in practice.

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.

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