A liquidity premium is an incremental return that compensates an investor for owning an asset that is not highly liquid. (Because the premium applies to assets with less liquidity, the term is also commonly referred to as an “illiquidity premium”.) Liquidity or illiquidity premiums are general terms rather than absolute numbers, and in most cases, can only be estimated. Liquidity refers to how easily an investment can be converted to cash. Assets with public markets, such as listed stocks, ETFs, and US Treasury bills, are considered to be highly liquid since they can usually be sold at any time at the prevailing market price. On the other hand, assets such as real estate, private equity, venture capital and many debt instruments are understood to have low liquidity. Liquidity is also related to the duration of an investment. Stated another way, a liquidity premium is an additional return that investors expect as compensation for tying up their capital for a longer period of time or for not being able to access their capital at all. Assets that are less liquid expose investors to risk factors that can be greater than those of equivalent liquid assets such as price volatility, economic risks, and asset-specific risks such as the potential for lower earnings or a default. In addition, less liquid assets present an increased opportunity risk, as they cannot be as easily liquidated to take advantage of better opportunities that may arise. The additional risks associated with less liquid assets cause investors to require a higher return from those assets over more liquid alternatives, creating liquidity premiums. Private equity has characteristically low liquidity and there are times when private equity investors do not have access to their capital at all. Accordingly, investors expect a higher return from private equity funds, which have historically been able to deliver excess returns through the unique strategies they employ.