Beyond Premiums: the Alternative Value of Illiquid Investments

One common (and fair) point that is often raised about illiquid assets is that they appear less volatile simply because of how and when they’re valued. Unlike public markets, where assets are continuously priced by market participants through countless transactions (marked-to-market), you can’t easily buy or sell private assets, which makes it harder to put a current price on them. Instead, private assets are typically marked-to-model: their valuations are anchored to the financial models from which they were most recently derived and are updated less frequently. This combination of forces creates an artificial smoothing effect that may mask true volatility. 

While public markets are more efficient at price setting, they are also susceptible to short-term noise — quarterly earnings surprises, shifting sentiment, macro headlines — that can drive prices away from long-term fundamentals. From this perspective, investments in private markets can offer an improved approach. Take private equity for example, where management teams focus on operational improvements and value creation over years, rather than quarters, potentially aligning better with your actual investment time horizon. Similarly, for private credit, locked-up loans reduce the pressure on business owners to continuously seek new funding or manage the market’s perception of their creditworthiness. 

Of course feeling more stable doesn't equate to being less risky. If you could see these assets’ true day-to-day movements, they might look similar to public markets. The risk is still there, it's just experienced differently. 

But less volatility, whether real or perceived, can be useful — so useful that some argue it should come at a price. As decades of research has shown, if you’re less tempted to react to market movements, you are more likely to end up with better outcomes. Behavioural traps such as panic selling have a significant impact on long-term performance. In that sense, illiquidity can act as a form of commitment device. When thoughtfully sized and aligned with long-term goals, that behavioural edge is precisely what can make illiquid assets so powerful in a well-constructed portfolio — whether you’re earning an illiquidity premium or paying for one.