What signifies the risk of having investments tied up for several years in private equity?

Illiquidity risk is the correct answer because it specifically pertains to the challenges and potential downsides associated with investments that cannot easily be converted into cash or sold. In the context of private equity, funds are typically committed for a long period—often spanning several years—during which investors may not have the ability to access their capital. This prolonged investment horizon means that capital is effectively locked up until the private equity firm realizes gains through divestments or exits, such as public offerings or sales of portfolio companies.

Illiquidity risk reflects the uncertainty and potential loss of value that investors face when they cannot easily liquidate their positions. Investors in private equity should be aware that their funds are not only long-term commitments but also carry the risk of being unable to respond to market changes or personal liquidity needs in the interim.

Market risk, credit risk, and operational risk do play important roles in the broader investment landscape, but they do not specifically capture the essence of having funds tied up for extended periods as illiquidity risk does. Market risk relates to changes in the value of investments based on price fluctuations in financial markets, credit risk deals with the possibility of default by issuers or borrowers, and operational risk encompasses risks arising from internal processes, systems, or people