Illiquid Investments: What They Are, Why They Exist, and Whether They Belong in Your Portfolio

Read time: 6 minutes

There is a word that appears in almost every private investment document and is almost never properly explained. Illiquid. It tends to sit quietly in a risk warning, sandwiched between other technical terms, and most readers move past it without fully absorbing what it means in practice.

That is a mistake. Liquidity, and the absence of it, is one of the most important characteristics of any investment. Understanding it properly, not just in the abstract but in terms of what it actually means for your money and your life, is essential before committing capital to any private investment opportunity.

At Oros Consultancy, we are direct about this with every investor we work with. Illiquidity is not a hidden risk to be glossed over. It is a defining feature of private investment that, when properly understood, helps explain both the opportunity and the discipline required to capture it.

What liquidity actually means

In investment terms, liquidity refers to how quickly and easily you can convert an asset into cash without significantly affecting its value.

A publicly listed share is highly liquid. If you own shares in a company listed on the London Stock Exchange and you decide you want to sell them this afternoon, you can almost certainly do so. There is a market of willing buyers and sellers operating continuously throughout the trading day. You place your order, the trade is executed, and the cash arrives in your account within a few days. The process is fast, straightforward, and the price you receive reflects the current market value of the shares.

A property is less liquid. If you decide you want to sell a buy-to-let flat this afternoon, you cannot. You need to instruct an agent, market the property, find a buyer, go through the conveyancing process, and complete the transaction. This takes months, not hours, and the price you ultimately receive depends on what a buyer is willing to pay at that particular moment in the market.

A private company investment is less liquid still. There is no exchange on which your stake can be traded. There is no ready pool of buyers waiting to purchase it from you on demand. Your capital is committed to the business for the duration of the investment period, and you cannot simply exit because you have changed your mind or because your circumstances have changed.

Why illiquid investments exist

If illiquidity is a constraint, why do illiquid investments exist at all? The answer is that illiquidity is not a flaw in the design of private investments. It is an inherent consequence of what those investments are trying to do.

Building a business, consolidating a fragmented industry, executing an acquisition programme, professionalising a group of companies and preparing them for a high-value exit, these things take time. They cannot be done in an afternoon, or a quarter, or even a year. They require sustained effort, patient capital, and the freedom to make decisions that are right for the long-term value of the business rather than for the next reporting period.

Public companies are subject to continuous scrutiny from markets, analysts, and shareholders who can sell their stakes at any moment. This creates pressure to manage for short-term performance in ways that can be genuinely destructive to long-term value creation. Private companies, funded by investors who have committed their capital for a defined period, are freed from this pressure. Management can focus on what actually matters.

This is one of the structural advantages of private market investing. The illiquidity is the price of admission to a different kind of investment opportunity, one where value is created deliberately and patiently rather than in response to short-term market sentiment.

The liquidity premium

There is a well-established principle in investment theory that investors who accept illiquidity should be compensated for doing so. This compensation is known as the illiquidity premium, and it is one of the reasons why private market investments have historically delivered stronger returns than comparable public market strategies over the long term.

The logic is straightforward. If two investments offer similar underlying risk and return characteristics, but one can be sold at any moment and the other cannot, a rational investor will demand a higher expected return from the illiquid one to compensate for the constraint. Over time, and across many investments, this premium has been a meaningful contributor to private market outperformance.

This does not mean that every illiquid investment will outperform its liquid equivalent. Individual investments can and do fail, and illiquidity does not provide any protection against loss. But it does mean that the additional return available in private markets is not simply a function of taking more risk. Part of it reflects a genuine, structural premium for accepting a constraint that many investors are unwilling or unable to bear.

How to think about illiquidity in the context of your own finances

The most important question any investor should ask before committing to an illiquid investment is not about the investment itself. It is about their own financial position.

Private investments are suitable only for investors who can genuinely afford to have that capital committed for the duration of the investment period without it affecting their standard of living, their financial security, or their ability to meet other obligations. This is not a bureaucratic compliance point. It is a practical reality. If you invest money you might need before the investment matures, you may find yourself in the uncomfortable position of being unable to access it when you need it most.

The right approach is to think about your overall financial position in layers. The first layer is liquidity, the cash and near-cash assets you need to meet your day-to-day requirements and to handle unexpected events without stress. The second layer is medium-term assets, things like listed investments that can be accessed relatively quickly if needed. The third layer is long-term, illiquid capital, money you are genuinely comfortable committing for a period of years in exchange for the potential of stronger returns.

Only money that sits genuinely in that third layer belongs in a private investment. If you have any doubt about whether capital is truly surplus to your near and medium-term needs, that doubt is itself the answer.

What illiquidity looks like in practice

It is worth being specific about what illiquidity actually means when you invest in a private company through a structured vehicle such as a loan note or an equity instrument.

Your capital is committed for the agreed investment term. You cannot request early redemption because your circumstances have changed, because you have found a better opportunity elsewhere, or because you are unhappy with how the investment is performing. The terms of the investment govern when and how your capital and any returns are returned to you.

This is not unique to any particular investment. It is the nature of private market investing. The best-structured opportunities are transparent about this from the outset, setting out clearly the expected investment term, the conditions under which capital will be returned, and the circumstances in which the term might be extended.

Knowing this going in is not a reason to avoid private investment. It is a reason to invest thoughtfully, with capital you have consciously set aside for this purpose, and with a clear understanding of the timeline you are signing up for.

Where illiquid investments fit in a broader portfolio

For high net worth individuals who have adequate liquidity elsewhere and are comfortable with the risk profile of private investment, illiquid assets can play a genuinely useful role in a well-constructed portfolio.

They offer exposure to return drivers that are different from those of public markets. They are not subject to the daily repricing that makes listed investments vulnerable to short-term sentiment swings. And they offer access to the illiquidity premium that has historically contributed to private market outperformance over the long term.

The appropriate proportion of illiquid assets in any portfolio will vary depending on the individual's overall financial position, their income, their other assets and liabilities, and their investment objectives. There is no universal answer. But for many high net worth individuals, the question is not whether illiquid investments have a role to play. It is how large that role should be and which specific opportunities are worth considering.

If you would like to explore the private investment opportunities currently presented by Oros Consultancy, and to understand whether they might be an appropriate addition to your portfolio, contact our team for a no-obligation conversation.

Your capital is at risk. You may lose all the money you invest. This article does not constitute financial advice and should not be relied upon as such. These investments are intended for Certified High Net Worth Individuals and Self-Certified Sophisticated Investors as defined under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. If you are in any doubt as to whether this investment is appropriate for you, please seek independent financial advice from a person authorised by the Financial Conduct Authority.