Private markets' illiquidity premium under scrutiny as performance lags public assets

What has long been sold as one of the great advantages of private markets may be less solid than investors were led to believe.

For years, private credit, direct lending, infrastructure and private equity were promoted on the idea that locking capital away should deliver extra compensation. The theory was straightforward: because investors could not get their money back quickly, they should receive a higher return than they would in public markets. That supposed reward is known as the illiquidity premium.

The problem, according to recent analysis, is that the premium has proved far harder to find in practice than in theory. Over the past 15 years, private assets have often failed to beat listed shares and bonds by enough to justify the loss of flexibility. In many cases, public markets have done better.

That conclusion matters because large institutions have built much of their portfolios around the assumption that private markets would pay them for patience. Bloomberg’s review of the four biggest Canadian pension funds suggested that much of their recent performance came from public equities anyway, even though those funds held relatively less of them. Former Public Sector Pension Investment Board chief investment officer Eduard van Gelderen told Bloomberg: “Most allocators have relied on this idea that private markets would generate an illiquidity premium on top of the returns in public markets.” He added: “This is clearly not the case.”

The picture is also more mixed than simple marketing slogans suggest. Ian Harnett of London-based Absolute Strategy Research has shown that the answer changes sharply depending on when the comparison starts. Since 1990, a private equity index has almost doubled the return of the S&P 500. But from 2009 onwards, the S&P 500 has outperformed that same private equity measure by about 20% in cumulative terms. Much of that gap reflects the huge rise of US megacap technology stocks, but it also underlines how sensitive the story is to timing.

Private credit has not been immune to the same doubts. Harnett’s work suggests that, over the long run, the least safe rung of listed bonds has held up at least as well as listed private credit funds, raising questions about whether investors have been paid enough for giving up liquidity there either.

The diversification case has also come under pressure. Private equity and private credit are often marketed as distinct from public markets, but Harnett’s analysis points to meaningful overlap, including heavy exposure to software. That concentration has become more visible as investors worry about the impact of artificial intelligence on software valuations, a theme some have dubbed the “SaaSpocalypse”.

The shift in investor behaviour is adding to the strain. S&P Global Market Intelligence reported in April and May 2025 that global pension funds were already above their target allocations to private equity, with more than half exceeding their limits. That kind of over-allocation can make it difficult for funds to commit fresh capital to new vehicles, especially when public markets move lower and cause the denominator effect to swell private allocations even further.

There are also practical signs that the asset class is becoming less convenient just as it has become more crowded. In the US, retail investors have been trying to withdraw from private credit funds in greater numbers, prompting some large managers to cap asset sales at 5%. The Reserve Bank of Australia has separately noted that the average holding period for private equity has lengthened from five years in 2010 to seven years now, a sign that cash is coming back more slowly than many investors expected.

That delay matters because it limits the ability to rebalance portfolios, redeploy capital or simply move on when better opportunities appear elsewhere. If the reward for that patience is not clearly higher returns, the trade-off starts to look much less attractive.

None of this means private markets can never outperform. There will be periods when some funds do well, and some strategies may still offer genuine diversification or access to opportunities not easily available on exchanges. But the broader claim that private assets routinely justify their illiquidity is looking much weaker than it once did.

For investors, that may be the real lesson: being unable to sell quickly is not the same as earning a premium for the privilege. In public markets, daily pricing can be uncomfortable. But it also keeps management under constant scrutiny, and that discipline may still prove worth more than the mystery of illiquidity.