Why Billionaires Prioritize Illiquid Assets Over Cash

In an era of geopolitical uncertainty and inflationary pressures, billionaires and ultra-high-net-worth individuals (UHNWIs) are redefining liquidity through strategic allocations to illiquid assets. While cash and liquid equities remain critical for flexibility, the ultra-wealthy increasingly prioritize alternatives like private equity, real estate, and hedge funds to preserve wealth and generate long-term value. This shift reflects a sophisticated understanding of liquidity not as immediate cash access, but as the ability to leverage appreciating assets without triggering capital gains taxes or exposing portfolios to market volatility.

Liquidity Strategy: Borrowing Against Appreciating Assets

Billionaires often treat illiquid assets as collateralized capital. According to a report by UBS, 42% of family office assets under management are allocated to alternatives, with 40% of these institutions planning to rely more on active management and manager selection to optimize returns [5]. By borrowing against appreciating real estate or private equity holdings, they access liquidity without selling assets—a strategy that avoids capital gains taxes and allows compounding. For instance, Warren Buffett’s Berkshire Hathaway has long leveraged long-term, illiquid investments in insurance and manufacturing to fund short-term obligations, demonstrating how debt can amplify liquidity without eroding portfolio value [3].

This approach is particularly potent in inflationary environments. As noted in a 2025 analysis, inflation reduces the real value of debt burdens, effectively increasing the purchasing power of leveraged assets [1]. For example, a billionaire holding a $100 million real estate portfolio with a $50 million mortgage would see the debt’s real value shrink by 10% annually in a 3% inflationary climate, effectively granting “free” liquidity over time.

Wealth Preservation: Tax Optimization and Inflation Hedging

Illiquid assets also serve as powerful tools for tax efficiency. Unlike liquid investments, which trigger taxable events upon sale, illiquid holdings allow UHNWIs to defer gains indefinitely. A 2025 study revealed that 46% of billionaire portfolios are allocated to alternatives, which often qualify for lower tax rates on carried interest or depreciation benefits in real estate [2]. Additionally, assets like private equity and real estate act as inflation hedges. During the 2025 market correction, when the S&P 500 fell 4.4%, REITs gained 2.8%, underscoring their resilience in downturns [2].

Long-Term Returns and Risk-Adjusted Performance

While liquid assets like equities deliver higher nominal returns over decades, illiquid investments often outperform on a risk-adjusted basis. Over 25 years (2000–2025), the S&P 500 returned 7.7% annually, but real estate—though yielding 9.5% over 10 years—provided lower volatility and diversification benefits due to its limited correlation with stocks (45–60%) [2]. Private equity, meanwhile, has historically delivered net internal rates of return (IRR) of 12.3% over five-year periods, outpacing public markets while smoothing portfolio volatility [4].

Conclusion: Illiquidity as a Strategic Advantage

For billionaires, illiquidity is not a constraint but a calculated tradeoff. By prioritizing assets that appreciate over time, hedge against inflation, and offer tax advantages, they transform traditional liquidity challenges into long-term wealth-building opportunities. As global markets remain volatile, the strategic allocation to illiquid assets will likely remain a cornerstone of elite wealth management.

Source:
[1] Why Billionaires Love Debt: The Financial Strategy You [https://medium.com/@amrmelharony/why-billionaires-love-debt-the-financial-strategy-you-didnt-know-about-9da1937d7908]
[2] The Millionaire's Playbook: Stocks vs. Real Estate in 2025 [https://www.genspark.ai/spark/the-millionaires-playbook-stocks-vs-real-estate-in-2025-which-path-creates-more-wealth/ecd145f4-10d3-4210-ac12-b01290b8c517]
[3] The Undervalued Power of Illiquidity [https://www.wellingscapital.com/blog/power-of-illiquidity]
[4] Alternative Investments of high-net-worth individuals [https://www.fool.com/research/high-net-worth-alternative-investments/]
[5] UBS Global Family Office Report 2025: Key investment [https://economymiddleeast.com/news/ubs-global-family-office-report-2025-key-investment-trends-and-strategic-shifts-among-the-worlds-wealthiest-families/]