In the private market, an investor often looks at potential profitability, but underestimates another key factor - liquidity. It is this that determines how realistic it is to exit a deal when needed, and not just when the market allows it.
Why liquidity is so important in investing
Liquidity is the ability to quickly sell an asset at an understandable market price. In the public market, liquidity is usually greater: shares can be bought or sold almost instantly. In the private market, everything is more complicated - finding a buyer and exiting a position can be much more difficult.
What happens in the private market
When an investor enters a Pre-IPO or venture deal, they are often betting on the long horizon. This means the money could be frozen until the next round, IPO, sale of the company, or a buyer on the secondary market.
Why it is important to understand this in advance
- high potential returns are almost always associated with lower liquidity
- exiting a position early may be expensive or difficult
- it is important for an investor to understand the exit scenario before purchasing
What are the exit scenarios?
- IPO company
- sale of business to a strategic buyer
- tender offer or secondary sale
- search for a buyer on the secondary market
What an investor should ask himself
- Am I ready to hold an asset for 1–3 years or longer?
- Do I need this money in the near future?
- Do I understand the exit mechanism?
- what will happen if the market worsens and liquidity decreases?
Conclusion
Liquidity is not an afterthought, but one of the key characteristics of an investment. In the private market, an investor must think not only about entry and potential profitability, but also about what the actual exit from the transaction might be.
Practical conclusion for the investor
Before entering a private deal, it is worth assessing not only the potential upside, but also the exit scenario: who can become the buyer, whether there is a secondary market, how quickly the position can be sold, and what costs will arise if an early exit occurs. It is this view that protects against mistakes when an investment looks attractive only at the entrance, but turns out to be inconvenient at the exit.