Assessing the liquidity risk in private equity

To contribute to the ongoing debate about private markets “illiquidity premium”, this paper proposes a new approach to liquidity as a dimension of private equity investing, along with risk and return. Along those lines, the liquidity risk associated with private equity lies in the variation of holding periods over time. To assess this risk, an equivalent to holding periods can be approached by calculating an average time-to-liquidity, which is a function of multiples and IRRs. Thanks to the high quality of the data provided by eFront Insight, it is possible to evaluate the average time-exposure of investors and estimate the variations around this average.