Definition
An instrument that trades continuously can be exited at a known price with little cost; a privately held loan cannot, so a market participant requires additional yield to hold it. That additional yield is the illiquidity premium, and it sits inside the spread used to discount a private credit instrument’s cashflows alongside the compensation for credit risk. Isolating it is a matter of judgement: it is not separately quoted, it overlaps with credit and complexity premia, and it varies with how hard the specific instrument would be to sell. Under IFRS 13 and ASC 820 it forms part of a significant unobservable input, which is why the mark’s spread is treated as an assumption to be evidenced and tested rather than read off a screen. It compensates for the difficulty of selling; it is distinct from any reduction in price, and the two should not be conflated.
Why it matters in private credit valuation
- Part of a private credit spread is payment for illiquidity rather than for credit, so a mark that ignores it understates the return a buyer would require to take the position.
- Because the premium is a judgement embedded in an unobservable input, it is exactly the kind of assumption a valuation committee and an auditor will expect to see reasoned and supported.
Related
Glossary terms
On markst
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markst values private credit independently on a published, reproducible methodology — marks an auditor and an LP can read straight through. Request access or book a demo. You can also read the valuation methodology or see Verus, the valuation engine.