What Are Illiquid Assets: Definition, Examples, and Risks

Illiquid assets are an essential component of investment portfolios, offering both unique opportunities and challenges. Unlike liquid assets, which can be easily converted into cash, illiquid assets are harder to sell or trade quickly without risking a significant loss in value. These assets often require a long-term commitment and are subject to factors like market conditions, buyer availability, and longer transaction times. In this article, you'll learn about illiquid assets, their risks, and their role in a well-balanced investment plan.

Illiquid Assets Definition

Illiquid assets are those that cannot be quickly sold or converted into cash without risking a substantial loss in value. The difficulty in liquidating illiquid assets arises from their low trading volume and activity, as well as price fluctuations that make it challenging to estimate an accurate value. This uncertainty makes it difficult for both buyers and sellers to agree on a price, further complicating the process of finding a buyer. Additionally, investors are often less willing to invest in illiquid assets, as the opportunity for a quick return is limited, and the associated risks are higher.

Illiquid Assets Examples

Illiquid assets come in many forms, and they differ in terms of their characteristics and the time required to realize their value. These assets are typically not easily converted into cash, often requiring more time and effort to sell compared to more liquid assets. Here are some of the most common examples of illiquid assets:

Real Estate

Real estate is one of the most common illiquid assets. Whether it's a house, commercial building, or office space, it may take months or even years to make a profitable sale due to factors like market conditions, location, and buyer demand.

Retirement Accounts

Retirement accounts, such as 401(k)s, IRAs, and pension plans, are designed for long-term retirement savings. Most retirement accounts are illiquid because there are restrictions on accessing funds before reaching retirement age. Early withdrawals may also be subject to penalties.

Collectibles

Collectibles are items collected for their aesthetic value, rarity, or potential investment value, such as art, antiques, or coins. These assets are considered illiquid because selling them often takes longer and requires specialized markets or buyers, making it difficult to quickly convert them into cash.

Private Equity

Private equity refers to investments in private companies that are not publicly traded. Private equity is generally highly illiquid because it lacks a secondary market where shares or interests can be bought and sold quickly. Investors may have to wait years for an exit event, such as a company sale or IPO.

Equipment and Machinery

Physical assets used in business operations, such as manufacturing machines, vehicles, or specialized tools, are considered illiquid. These assets typically depreciate over time, which can make it difficult to sell them at a favorable price, especially when a quick sale is necessary.

Read Also: What is the Difference Between Liquid and Illiquid Assets?

Benefits of Illiquid Assets

Illiquid assets are typically of high financial value, and this is because they are assets such as real estate, equipment and machinery, or long-term investments and savings like private equity and retirement accounts as clarified in the examples previously. Their high values make them reliable long-term assets that support in diversifying a business’s investment portfolio.

Investors with a long-term investment perspective would obviously choose to invest in an illiquid asset, as these assets often provide the potential for significant returns over time. Illiquid assets, such as real estate, private equity, and collectibles, typically experience appreciation in value, particularly when held for extended periods. This makes them ideal for investors looking to build wealth over time rather than seeking short-term gains.

Furthermore, illiquid assets tend to be less affected by daily market fluctuations, providing stability and reducing exposure to short-term volatility. This characteristic can be especially appealing to investors seeking to protect their portfolios from market downturns.

Risks of Illiquid Assets

Illiquid assets expose businesses to higher risks, although they offer several benefits, they still have some drawbacks. Unlike liquid assets, illiquid assets are not easily converted into cash. These assets typically require a longer time to realize returns and often involve longer lock-up periods, during which the business cannot access the funds tied up in these investments.

Moreover, illiquid assets may have a limited pool of potential buyers in the market, making it more difficult to sell them quickly without incurring a loss. This lack of market demand can lead to the need for price reductions to attract buyers, which may further reduce the asset's value. Additionally, businesses holding illiquid assets are more vulnerable to liquidity risks, particularly during economic downturns or periods of financial strain, as they may not be able to access the cash needed to meet immediate obligations or opportunities.

Therefore, while illiquid assets are effective for diversification, provide higher returns, and have other benefits they also pose challenges related to market timing, buyer availability, and financial flexibility.

How Enerpize Helps You in Illiquid Assets Management

Enerpize will provide you with a comprehensive overview of your illiquid assets, offering clear insights into their value and life cycle. The software allows you to add, track, and categorize illiquid assets, as well as manage asset's various values, including both purchase and current values.

You can assign an employee responsible for each asset, streamline asset organization by allocating them under predefined asset account categories, and track the status of assets, whether in-service or written-off. Additionally, Enerpize offers detailed reports, transaction histories, and operational logs, enabling you to make informed decisions and maintain efficient asset management.

This fixed asset management software will help you track and manage assets that depreciate over time through an automated cycle that enables you to select the depreciation method based on the asset, determine the depreciation period and amount and the system updates the periodic depreciation automatically till the end of the asset life cycle.

FAQs About Illiquid Assets

What are examples of illiquid assets?

Illiquid assets come in various forms, each with distinct characteristics. Some illiquid assets, such as private equity and real estate, require a longer time horizon to generate returns. Another example of illiquid assets involves long lock-up periods, where funds are inaccessible until a specified time, such as in retirement accounts. Additionally, there are illiquid assets, like equipment and machinery, that often depreciate over time, reducing their value as they age.

What is the most illiquid current asset?

Private equities are the most illiquid assets, they refer to investments in privately held businesses that do not trade on public stock markets. These assets are considered very illiquid since there is no established secondary market for purchasing and selling shares of these companies. Investors in private equity frequently must wait for a specific exit event, such as an acquisition, public offering, or buyout, which might take years. During this time, the investment cannot be easily sold or liquidated without risking substantial losses.

Is gold an illiquid asset?

Gold is considered a very liquid asset as it has a global market, and there is always a demand for it, and can typically be sold quickly. Gold is also considered a stable store of value and is easily recognized for its worth, which makes it easier to find buyers.