How the illiquidity premium works, how it varies by vehicle, and why manager selection matters more than the lockup.
The illiquidity premium is the additional return an investor may earn for committing capital that cannot be sold on demand. It is compensation for a real constraint, not a guaranteed outcome. Cambridge Associates data through December 31, 2025 show its measured size depends heavily on the period, the public benchmark, and above all the manager selected.
Key takeaways
- The illiquidity premium is the additional return an investor may earn for accepting a capital lockup. It is not guaranteed, and its measured size has varied widely by period and benchmark.
- Over the 10 years ended December 31, 2025, the Cambridge Associates US Private Equity Index returned 15.2% net of fees, against 15.1% for its S&P 500 mPME and 9.9% for its Russell 2000 mPME (Cambridge Associates, July 2026).
- The Cliffwater Direct Lending Index has delivered almost 22 years of annual returns averaging 9.5% through June 30, 2026, unlevered and gross of fees. Returns before the index’s 2015 launch are reconstructed (Cliffwater, August 2026).
- Evergreen and interval structures restructure illiquidity rather than remove it. Repurchase requests at non-traded BDCs reached 12.4% of NAV in Q2 2026, against quarterly caps typically set at 5% (Robert A. Stanger & Co., August 2026).
- Manager selection, not illiquidity itself, is the primary risk variable. J.P. Morgan reported an average gap of 21 percentage points between top- and bottom-quartile private equity managers, based on 10-year IRRs ending in the second quarter of 2023; J.P. Morgan does not state whether those IRRs are net or gross of fees.
What is the illiquidity premium in private markets?
The illiquidity premium is the additional return an investor may earn in exchange for capital committed for a defined period. It is compensation for the inability to sell a position quickly without a material price concession, or at all until a defined liquidity event occurs.
The mechanism behind the illiquidity premium is structural, and financial research has linked illiquidity to higher expected returns since at least Amihud and Mendelson’s 1986 study of asset pricing and bid-ask spreads.1 Public market securities command a price premium in part because they can be bought and sold at will. Private market assets, including direct loans, equity stakes in private companies, and real assets, are generally priced at a discount that reflects the fact that they cannot be liquidated on demand. That discount is the potential source of the investor’s additional return. It is available only to capital that accepts a real constraint, and it is not assured: entry price, leverage, fees, and manager decisions can absorb it entirely.
In BIP Capital’s view, the underallocation to private markets among many independent advisory firms is not primarily a supply problem. Access has expanded through interval funds and other evergreen structures: Cerulli Associates estimates that interval funds held approximately $132 billion across 147 funds at year-end 2025.2 What has not kept pace is the precision with which illiquidity is framed, both at the investment committee level and in client communications. Positioning illiquidity only as a cost to be tolerated produces the wrong conversations downstream. The illiquidity constraint and the potential illiquidity premium are the same feature, viewed from opposite sides.
Illiquidity is not a risk layered on top of market risk. It is a separate dimension of risk, one the investor accepts consciously in exchange for exposure to return sources that daily-liquidity portfolios are not designed to capture.
What does the evidence show about the size of the illiquidity premium?
Over the 10 years ended December 31, 2025, the Cambridge Associates US Private Equity Index returned 15.2% annualized, net of fees, expenses, and carried interest, according to Cambridge Associates’ Calendar Year 2025 benchmark commentary published July 30, 2026. Over the same period, Cambridge Associates’ modified public market equivalent (mPME) built on the S&P 500 returned 15.1%, and the mPME built on the Russell 2000 returned 9.9%.3
The private equity comparison depends on the benchmark and the period. In the same Cambridge Associates data, the US Private Equity Index returned 11.7% over five years, against 14.9% for the S&P 500 mPME, and 12.4% over 25 years, against 10.0%. Cambridge Associates noted that comparisons favored public markets in most periods shorter than ten years.3 The record supports a premium over small-cap public equity across long horizons; against large-cap US equity over the past decade, the measured difference has been narrow.
In private credit, the Cliffwater Direct Lending Index (CDLI), which covers more than 23,000 directly originated US middle market loans totaling $553 billion, has delivered almost 22 years of annual returns averaging 9.5% through June 30, 2026, with one negative year (2008), according to Cliffwater’s mid-year release of August 19, 2026.4 That figure is a simple average of annual returns, not an annualized compound rate. CDLI returns are unlevered and gross of fees, so an investor in an actual fund would have earned less after management fees, incentive fees, and expenses. Cliffwater launched the CDLI in 2015; returns for earlier periods are reconstructed from historical business development company filings.4
Recent CDLI results have run below the index’s long-run average. Cliffwater reported a 9.3% CDLI return for calendar year 2025 and a 7.7% return for the 12 months ended June 30, 2026.5
The illiquidity premium, where it exists, is not free. It requires patience, structural discipline, and judgment about where to enter the capital structure. The index-level figures above describe broad markets, not any individual fund an advisory firm can buy, and they do not predict future results.
How does illiquidity differ across private market vehicles?
Private market vehicles structure illiquidity differently, and those differences carry through to diligence requirements and client suitability. The table below summarizes the general liquidity mechanics of the main vehicle types; specific terms vary by fund and are set in each fund’s offering documents.
General structural features. Specific terms are set in each fund’s prospectus or offering documents. On September 30, 2026, the SEC proposed amendments to Rule 23c-3 that would, among other changes, permit monthly repurchase offers.7
Evergreen structures let advisory firms provide private market exposure to clients who need some optionality, without a full closed-end commitment. The illiquidity tradeoff is restructured, not eliminated. Repurchase requests at publicly registered non-traded BDCs reached 12.4% of NAV in the second quarter of 2026, against quarterly caps typically set at 5%, according to Robert A. Stanger & Co., and sponsors satisfied 38% of requested repurchases that quarter.9 Client-level liquidity expectations should be calibrated to vehicle structure before any allocation. BIP Capital’s companion piece on how interval and evergreen funds work covers these mechanics in more detail.
How are private market assets valued, and what should advisory firms ask?
Private market assets are valued using a mark-to-model methodology. Rather than relying on a market-clearing price, the manager applies a valuation framework, such as discounted cash flows, comparable transaction multiples, or third-party appraisals, to determine net asset value. The result is a reported return profile that is materially smoother than that of equivalent public market exposure, and one that reflects valuation methodology and governance as much as underlying asset performance.
Smoothness in reported private market returns is not the same as stability. In a credit downturn, a private loan portfolio will experience stress whether or not interim marks reflect it immediately. Mark-to-model valuation can delay the recognition of that stress, with consequences in both directions depending on the quality of the manager’s valuation discipline and the consistency with which it is applied across cycles.
In evergreen structures, valuation governance is a foundational diligence question rather than a secondary one. Because investors subscribe and redeem at the manager-determined NAV, the integrity of the valuation process directly affects fairness between entering, remaining, and exiting investors. In vehicles that calculate incentive fees on NAV, unrealized gains can also affect what the manager is paid. Diligence on valuation methodology should be treated as coequal with diligence on investment process. The questions below represent a minimum threshold for an evergreen allocation review.
Valuation diligence: key questions
- How are underlying assets marked: internally, or with independent third-party validation?
- How is realized versus unrealized performance reported and distinguished in investor materials?
- What is the manager’s stated valuation policy, and has it been applied the same way across market cycles?
- How has NAV behaved in stressed environments, and is there a documented history against which to assess it?
- For evergreen structures: is any incentive fee calculated on unrealized values, and how is that governed relative to fairness at subscription and redemption?
Where does the primary risk in private market investing sit?
The primary risk variable in private market investing is manager selection, not illiquidity itself. J.P. Morgan Private Bank, citing Burgiss and J.P. Morgan Asset Management data, reported an average performance differential of 21 percentage points between top- and bottom-quartile private equity managers, measured on 10-year horizon IRRs ending in the second quarter of 2023. J.P. Morgan does not state whether those IRRs are net or gross of fees.10 Accepting illiquidity grants access to the asset class; the manager selected determines what that access is worth. BIP Capital examines this in more depth in manager dispersion: access versus selection and why manager selection matters more in private markets.
Manager dispersion carries two caveats for advisory firms. A fund’s final quartile ranking is not known when the commitment is made, and research by Harris, Jenkinson, Kaplan, and Stucke (NBER Working Paper 28109, November 2020) finds little evidence of performance persistence for buyout funds raised since 2000 when measured on information available at fundraising.11 Dispersion is a reason for disciplined, repeatable diligence, not evidence that any particular manager will land in the top quartile.
How do RIA allocations to private markets compare with institutional allocations?
Institutional allocators have made larger, deliberate commitments to illiquid assets. The Pew Charitable Trusts reported in April 2025 that, as of 2022, 43 state pension plans allocated more than 10% of assets to private equity, and the share of alternatives across individual plans ranged as high as 64.4%.12 CalPERS raised its private markets target from 33% to 40% of the total portfolio in March 2024, according to Preqin.13
Advisor allocations to private markets remain concentrated in a minority of firms. Cerulli Associates’ U.S. Private Markets 2026 report estimates that US advisors hold $2.2 trillion in less-than-fully-liquid private capital, but only 11.1% of advisors allocate 10% or more to such products, and among independent RIAs that share is 6.7%.2
The constraints that historically limited advisory firms’ access to private markets, including high minimums, qualified purchaser thresholds, and operational complexity, have been partly addressed by evergreen and interval structures. Whether a larger allocation is appropriate depends on each client’s liquidity needs, time horizon, and capacity to bear loss. The remaining work is analytical: aligning vehicle structure with client circumstances.
What does this mean for an advisory firm’s private markets practice?
Illiquidity is not a defect to be overcome in private market allocation. It is the potential source of an illiquidity premium that daily-liquidity portfolios are not designed to capture, and it carries real costs: capital that cannot be withdrawn on demand, valuations set by models rather than markets, and wide dispersion in manager outcomes. A durable private markets practice applies analytical rigor at every layer: vehicle selection, manager diligence, valuation governance, and client-level liquidity calibration.
Frequently asked questions
What is the illiquidity premium in private markets?
The illiquidity premium is the additional return an investor may earn for committing capital that cannot be sold on demand. Private assets are generally priced at a discount that reflects this constraint, and that discount is the potential source of return. The premium is not guaranteed and has varied widely by period, benchmark, and manager.
Has private equity delivered an illiquidity premium over public markets?
It depends on the period and the benchmark. Over the 10 years ended December 31, 2025, the Cambridge Associates US Private Equity Index returned 15.2% net of fees, versus 15.1% for its S&P 500 mPME and 9.9% for its Russell 2000 mPME. Over five years, the S&P 500 mPME was higher. Past performance does not predict future results.
Do evergreen and interval funds remove the illiquidity tradeoff?
No. They restructure it. Interval funds and non-traded BDCs offer periodic repurchases, usually quarterly and capped, often at 5% of shares or NAV. When requests exceed the cap, fills are prorated. Robert A. Stanger & Co. reported non-traded BDC repurchase requests of 12.4% of NAV in Q2 2026, so periodic liquidity is not on-demand liquidity.
Where does the primary risk in private market investing sit?
In manager selection. Accepting illiquidity provides access to the asset class, but outcomes vary widely by manager. J.P. Morgan reported a 21-point average gap between top- and bottom-quartile private equity managers, on 10-year IRRs through mid-2023 with fee basis unstated. Research also finds limited persistence in buyout performance across successive funds.
What is mark-to-model valuation, and why does it matter for diligence?
Private assets are valued with a manager-applied framework, such as discounted cash flows, comparable transaction multiples, or third-party appraisals, rather than a market-clearing price. Reported returns are smoother than public equivalents, but the economic exposure is unchanged. In evergreen vehicles, investors subscribe and redeem at that NAV, so valuation quality affects fairness between entering and exiting investors.
How do RIA allocations to private markets compare with institutional allocations?
Institutions hold larger illiquid allocations. The Pew Charitable Trusts reported that 43 state pension plans held more than 10% in private equity as of 2022, and CalPERS targets 40% in private markets. Cerulli Associates’ 2026 research finds only 11.1% of US advisors, and 6.7% of independent RIAs, allocate 10% or more to less-than-fully-liquid alternatives.
About BIP Capital
BIP Capital is an SEC-registered investment adviser headquartered in Atlanta, Georgia, serving registered investment advisers and family offices with private equity and private credit strategies. BIP Capital and its affiliates sponsor private market investment vehicles, including evergreen structures of the kind described in this article. BIP Ventures refers to the venture and growth equity activities of BIP Capital and its affiliates. LAGO Asset Management serves as manager and originator of LAGO-branded private credit strategies, for which BIP Capital serves as platform and distributor.
Sources
- Yakov Amihud and Haim Mendelson, “Asset Pricing and the Bid-Ask Spread,” Journal of Financial Economics 17, no. 2 (1986): 223–249.
- Cerulli Associates, U.S. Private Markets 2026: Scaling Retail Access, 2026; interval fund figures as summarized by AltsWire.
- Cambridge Associates LLC, US PE/VC Benchmark Commentary: Calendar Year 2025, published July 30, 2026. Periods ended December 31, 2025. Private index returns are pooled horizon IRRs, net of fees, expenses, and carried interest; mPME returns are dollar-weighted.
- Cliffwater LLC, “Private Credit Shows Resilience in Cliffwater Direct Lending Index Data,” August 19, 2026. Data through June 30, 2026. CDLI returns are unlevered and gross of fees; pre-2015 returns are reconstructed.
- Cliffwater LLC, CDLI 2025 results release, March 31, 2026; CDLI mid-year results release, August 19, 2026.
- Bain & Company, Global Private Equity Report 2026 press release, February 23, 2026.
- Morrison & Foerster, “SEC Proposes Changes to Interval Fund Exemptive Rules,” October 2026, describing Investment Company Act Rule 23c-3 and the SEC’s September 30, 2026 proposal.
- Northern Trust, “Evaluating Tender Offer and Interval Funds for Semi-Liquid Access.”
- Robert A. Stanger & Co., The Stanger Report, Second Quarter 2026 Non-Listed BDC Edition, as reported by IREI (August 11, 2026) and Connect Money.
- J.P. Morgan Private Bank, The case for alternative investments, published June 6, 2025. Sources cited: Burgiss, NCREIF, Morningstar, PivotalPath, J.P. Morgan Asset Management. Global private equity represented by 10-year horizon IRR ending 2Q 2023; data as of November 30, 2023.
- Robert Harris, Tim Jenkinson, Steven Kaplan, and Rüdiger Stucke, “Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds,” NBER Working Paper 28109, November 2020.
- The Pew Charitable Trusts, state pension investment issue brief, April 2025. Data as of 2022.
- Preqin, “US pension fund CalPERS adopts total portfolio approach,” July 1, 2026.