Using a comprehensive dataset containing the cash flows of 3,421 liquidated private equity investments made before the recent financial crisis (1981-2004), we find positive and significant loadings of investment returns on aggregate liquidity innovation measures and liquidity risk factors. The premium for liquidity risk of private equity is up to 15% per year. After adjusting performance for liquidity risk, (gross-of-fees) private equity investments have an NPV close to zero. We also find that larger investments have higher exposure to liquidity risk. These results are robust to various changes in the empirical design. Our study has important implications for the performance evaluation of private equity investments. They also indicate that the increased allocation to private equity may lengthen liquidity-based financial crisis.