The illiquidity premium? | Hacker News Reader

The illiquidity premium?

aaronkharris.com

11 pointssiruva0712 comments

Interesting article. The title is misleading, though. The author talks about why the liquidity premium may go down, but it won't become negative.

Thanks for pointing that out. My point is not that the liquidity premium will go negative, but that there could be just as much (or as little) premium for illiquid assets as for liquid assets when SWFs are driving force in the market.

Are we using the same definitions? I thought the liquidity premium is the differential in return people are willing to incur for the convenience of liquid over illiquid assets?

What meaning of premium are you using? I want to make sense of "[...] just as much (or as little) premium for illiquid assets as for liquid assets [...]". Thanks.

Same definition. Right now markets pay a premium for the convenience of liquid assets as you say. What I'm saying is that the investment profiles of the SWFs may lower that premium/raise the price of illiquid assets such that the two are effectively the same price. Feels like two sides of the same coin.

I could probably have been clearer, but I kindof liked the way the title sounded. Appreciate the feedback.

Perhaps a better way of stating it would be:

Illiquid investments currently need to pay a premium over their more liquid counterparts. However, an increase in long term investors may reduce this requirement over time.

Yes, that's clear. The clever title "Illiquidity premium" is OK.

If I understand this blog post correctly, it seems to be suggesting that sovereign wealth funds would be potential investors for startups and that they would be ideal investors because they would not be seeking a short-term exit/liquidity event.

That seems unlikely to me, given the risks inherent in startups, and the fact that the VCs drive for rapid ROI is arguably an important source of focus for proving/disproving a business model before you burn through too much capital.

I think that the characteristics described in the article would make this funds very good VC. They could divert some money to invest in specific domains funds.

They would probably get some good return in money but also achieve some strategic goals and some middle-term economic growth.

You might be right if they invest in small enough amounts. But if they try to invest at the size necessary to matter to their own portfolios, that's when you would have issues.

Too much cash infused into a new or developing start-up can actually destroy the incentives needed for the start-up to be successful. Not needing to budget well and prioritize features (because we have cash to do them all) fights against the do the first things first, and do them well mentality needed to move a budding idea into an actual revenue stream.

I think you're misreading it slightly. It's not that SWFs are the ideal investors for startups, it's that they're pushing a ton of money into the ecosystem and distorting it.

SWF seeking long term relationship.

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