Illiquid assets

Anyone who owns something wants to be able to turn it back into money in an emergency. How easily that succeeds varies greatly from asset to asset. Money in a checking account is available immediately. An apartment, on the other hand, cannot be sold in an afternoon: you need a buyer, a notary, and often months of time. Such hard-to-sell possessions are called illiquid assets. Illiquid essentially means “not liquid” — the wealth is stuck and cannot be easily moved.

Why companies can fail because of illiquid holdings

A company can be rich on paper and still go bankrupt. This happens when bills fall due immediately, but the assets are tied up in things that are hard to sell. Banks have already collapsed for exactly this reason. Experts call this a liquidity crisis: it’s not a lack of value, it’s a lack of quickly available money.

A well-known example is Silicon Valley Bank in 2023. It had put customer deposits into long-term bonds, meaning securities with a fixed maturity. When many customers wanted to withdraw their money at the same time, the bank had to hastily sell these securities — at heavy losses. Within a few days, it was finished.

This is also relevant for private investors. Anyone who puts all their savings into a property has a problem if the car suddenly needs repairing. That’s why advisors almost always recommend a reserve of money that is available at all times. Illiquid investments are not bad, they just shouldn’t be the only pillar.

How to recognize how liquid a possession is

What matters is how many buyers and sellers exist for a given thing. Shares of large corporations are traded by millions of people every day. A sell order is executed within seconds, and the price stays practically the same. For a painting or a piece of forest land, there might be only three serious interested parties in the whole country.

A second indicator is the so-called bid-ask spread. This is the difference between the price buyers offer and the price sellers demand. For liquid assets, this spread is often below one percent. For illiquid assets, it can be ten percent or more. This gap is essentially the price of urgency.

This leads to an important rule: illiquidity is not a fixed property, but a matter of time. Almost anything can be sold if you wait long enough. Anyone who needs money immediately, however, has to accept a discount. Experts then speak of a distress sale or fire sale.

Where the term appears in business news

It’s read especially often in connection with private equity and venture capital. In these cases, investors buy stakes in companies that are not traded on the stock exchange. Such stakes are locked up for years. Investors demand a higher return for this — the so-called illiquidity premium, a reward for waiting.

The word also comes up regularly with open-end real estate funds. Investors there can redeem shares daily, yet the fund owns buildings. If too many people want to exit at the same time, the fund has to freeze redemptions. This happened several times in Germany after the 2008 financial crisis.

In the tech world, this applies to employee shares in start-ups. These shares can be worth a lot on paper but are hardly sellable before an IPO. A common misconception is that illiquid means the same as worthless. That’s not true: the value is there, it’s just that quick access to it is missing.