Definition
A Liquidity Discount is a reduction applied to asset values to account for the cost, time, and uncertainty involved in converting assets to cash. This adjustment recognizes that a dollar available immediately is worth more than a dollar that requires months to realize through an illiquid asset sale.
Significance in Alternative Asset Valuation
Liquidity discounts are conceptually related to but distinct from marketability discounts:
When liquidity discounts apply:
- Lending decisions: Banks discount collateral values for liquidation scenarios
- Portfolio valuations: Institutional investors may discount illiquid holdings
- Estate planning: Immediate cash needs versus illiquid asset holdings
- Divorce settlements: Valuing assets that must be divided but not immediately sold
Determining appropriate discounts:
- Historical liquidation data for similar assets
- Current market conditions and buyer demand
- Transaction costs including commissions and fees
- Time value of money during extended sale periods
Unlike marketability discounts (which address restrictions on sale), liquidity discounts focus on the practical realities of achieving fair value within reasonable timeframes.
How Impossival Approaches This
We provide liquidity analysis alongside valuations, helping stakeholders understand realistic timeframes and potential costs for converting alternative assets to cash. This analysis supports appropriate discount determinations.
Related Concepts
• Illiquidity Discount - Related valuation adjustment • Marketability Discount - Discount for sale restrictions • Market Liquidity - Ease of asset conversion • Fair Market Value - Value before discount application