The illiquidity premium myth in private markets.

Anyone who has spent time around Indian private banking has heard the same argument. Private equity, private credit, structured products with lock-ins — all carry an illiquidity premium. They pay you, the argument goes, an extra few percent above public-market returns in exchange for the inconvenience of not being able to access your capital for several years.

The argument is partly true. The trouble is in the partly.

What the data actually shows

The dispersion of returns in private markets is wider than in public markets. The top-quartile private equity manager, over fifteen years, has materially outperformed broad listed equities. The bottom-quartile private equity manager has materially underperformed. The median private equity manager, after fees, taxes, and the time-weighted impact of the investment period, has historically delivered something close to — and in some periods, below — broad listed equity benchmarks.

The illiquidity premium, in other words, is real for the median investor, only when accessed via the top-quartile manager. The investor who buys into the median manager is not capturing a premium. They are paying a fee for illiquidity.

This is not a controversial statement among institutional investors. It is, however, almost never communicated in the form in which Indian wealth-management distributors present private products. The brochures show top-quartile-equivalent track records, with footnotes about manager dispersion that few clients read.

The four costs of illiquidity that brochures don't mention

Beyond the manager-selection problem, illiquidity has direct and indirect costs that most pitches understate.

1. Opportunity cost during the J-curve. Private investments deploy capital over several years; for the first few years, the family's reported NAV is below the committed capital. During this period, alternative uses of the capital — even into liquid markets — generate returns that the private deployment does not.

2. Fee drag, layered. Most private products carry management fees of 1.5-2.5% on committed capital, and performance fees of 15-20% above hurdles. The compounding fee drag, over the life of a fund, often consumes most of the apparent gross outperformance.

3. Tax inefficiency. Many Indian private structures pass through gains as short-term, often at higher rates than the long-term capital gains regime that applies to listed equities. The post-tax illiquidity premium is consistently smaller than the pre-tax one.

4. Forced timing. Private investments often require the family to commit to a deployment period and an exit period that may not align with the family's actual cash flow needs. A liquidity crunch — a tax payment, a real estate purchase, a children's education obligation — can force a family to borrow expensively against a private commitment that is theoretically valuable but practically inaccessible.

When private exposures genuinely add value

We are not arguing that families should avoid private markets. We are arguing for selectivity. In our practice, we typically recommend private exposures in three specific situations:

• Where the family has a clear manager-access advantage — a relationship, a co-investment, a structural ability to participate in vehicles that retail money cannot.
• Where the family has match between the private commitment's life cycle and a known long-horizon liability — for example, a 12-year private fund matching a child's education timeline plus a buffer.
• Where the thesis of the private investment is genuinely unavailable in public markets — a thematic exposure (early-stage tech, certain real-asset categories, specific emerging-market private credit) that the family wants and cannot access through listed instruments.

Outside these three cases, the private investment is, more often than not, a way to charge higher fees on capital that would have done at least as well in low-cost public markets.

A discipline for evaluating private offers

When a private offer comes through to a family, we run it against three quick tests:

• What is the manager's specific track record on this strategy — not their broader brand?
• What is the all-in cost, including layered fees and tax inefficiency?
• Does this exposure require us to accept illiquidity that we don't otherwise need?

If the answer to any of these is unsatisfactory, the offer is, almost always, a worse version of something the family could replicate with public-market exposures and a more disciplined allocation.

The plain version

Illiquidity is genuinely valuable when it is used to access something that genuinely cannot be accessed otherwise, with a manager who is genuinely better than the median, at fees that are genuinely net of cost. These three "genuinelys", in our experience, hold for a small minority of the private offers that are made to Indian wealthy families.

The rest is the borrowing of return from another time, plus a layer of fee. Families that recognise this become, on average, harder customers for private placements — and better-served by their balance sheets.