Non-marketability

Non-marketability refers to the inability or significant difficulty in readily converting an asset or investment into cash at its fair market value due to a lack of active trading, a limited pool of potential buyers, or restrictions on its transfer. This characteristic often results in a discount on the asset's perceived worth, as liquidity is diminished, and the time needed to sell the asset may be extended, creating a loss of value. Factors like illiquidity, regulatory constraints, and unique asset features all contribute to non-marketability, influencing valuation and investment decisions.

Non-marketability meaning with examples

• The private equity firm assessed a substantial non-marketability discount on its holdings, anticipating a lengthy process to find buyers for the company shares. This reduced the perceived overall value of the investment portfolio, impacting the fund's net asset value. Without readily available public markets, selling these investments quickly became improbable.
• Due to complex ownership structures and limited public interest, the antique car faced a considerable non-marketability problem. Its worth was high for collectors, yet without the right environment to sell, the time spent marketing and the lack of a broad auction environment made it difficult to extract the car’s best market value within an acceptable time frame.
• Real estate in a remote location, characterized by low population density, experiences non-marketability challenges. Prospective buyers are limited, and the marketing time may extend for months or years. This decreased liquidity reflects on the asset’s price when comparing similar properties located in locations that are easier to sell.
• Startup stock is subject to non-marketability during its initial phase. Employee stock options usually involve lock-up agreements, so no shares can be readily traded until IPO. This lack of trading limits investors who need to convert the assets to cash and lowers the stock’s immediate value.
• Artwork created by a lesser-known artist, even with a great intrinsic value, can suffer from non-marketability. The size of the buyer pool is typically smaller, and determining its market value can be very challenging. This limits the ability of the owner to extract full, immediate value from a potential sale.