Illiquidity premium growing in importance as an investment driver into private markets

Written by Adam Cadle

29/01/2025

The illiquidity premium is growing in importance as a driver of investments into private markets among institutional investors, according to new research, with 73% of investors also expecting private to outperform public markets over the next five years.

The research, published by Aviva Investors, revealed that in 2023, only a quarter of investors counted the illiquidity premium as a main reason for investing in private markets, against 40% this year – and 47% expect it to be a key reason in the next two years. It is set to overtake long-term and inflation-linked income as a motivator.

Also over five years, 50-60% of respondents expect the strongest risk-adjusted returns to come from the equity portion of private markets – real estate, infrastructure and private equity – while 38-48% expect private debt asset classes to post weaker risk-adjusted returns.

Globally, average declared allocations to private market rose slightly to just over 11% in the last year, but remained flat in North America, at just above 12%.

Barriers still remain, however, to investing in private markets, the research stated. At a global level, asset valuations and high transaction costs are the two biggest barriers, both for 46% of investors. Views on asset valuations being a barrier are slightly up from last year in Europe and Asia Pacific, while a growing share of North Americans see high transaction costs as a barrier. Forty per cent of North American investors cite difficulty in benchmarking performance as one of the biggest barriers to investing in private market assets.

This study was conducted by CoreData Research in September and October 2024, and it questioned senior decision makers at 500 institutional investors in Europe (270), North America (90) and Asia-Pacific (140), with combined assets of US$4.3trn.

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