You’re on a roll
Create a free account to save your CFA progress, track your accuracy by topic, and pick up right where you left off.
Free Questions › CFA › Specialized Pathway - Private Markets
Free CFA Specialized Pathway - Private Markets Practice Questions & Answers
500 exam-style Specialized Pathway - Private Markets questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 61
A fund has called $100 million, distributed $40 million, and has a remaining NAV of $90 million. What is the TVPI (Total Value to Paid-In)?
Select an option first.
Correct answer: C — 1.30
Explanation: C is correct: TVPI = (Distributions + NAV) ÷ Paid-In = ($40M + $90M) ÷ $100M = 1.30. TVPI combines realised and unrealised value. A is wrong (DPI only = 0.40). B is wrong (only NAV ratio = 0.90). D is wrong (2.30 would require $190M combined). A TVPI of 1.30 means the fund has created 30% of value above capital invested.
Question 62
The RVPI (Residual Value to Paid-In) ratio measures:
Select an option first.
Correct answer: B — The remaining unrealised NAV of the fund relative to capital called
Explanation: B is correct: RVPI = NAV ÷ Paid-In Capital. It shows what proportion of the original capital remains locked in the portfolio at current estimated values. RVPI decreases as exits occur. A describes DPI. C describes IRR. D describes the fee ratio, which is not a standard performance metric in this context.
Question 63
Which performance metric for private equity is most analogous to a 'money-on-money' multiple and measures total value created relative to total capital invested?
Select an option first.
Correct answer: B — TVPI
Explanation: B is correct: TVPI (Total Value to Paid-In) is the private equity equivalent of a money-multiple — it shows how many times investors have gotten back their invested capital in total (both distributions and remaining value). An IRR is a time-weighted return. RVPI is only the unrealised portion. PME (Public Market Equivalent) is a benchmark comparison tool.
Question 64
Why is IRR alone considered an insufficient measure of private equity performance?
Select an option first.
Correct answer: B — IRR ignores the size and timing of capital returned and can be artificially inflated by early small distributions
Explanation: B is correct: IRR can be gamed by strategies that generate small but early returns (boosting the rate) even if total capital returned is modest. It also doesn't reflect absolute dollar value creation. TVPI and DPI must be reviewed alongside IRR for a complete picture. A is wrong because IRR handles irregular cash flows. C is wrong because IRR can be compared across vintages. D is wrong because IRR uses compound (geometric) methodology.
Question 65
A private equity fund's IRR significantly exceeds the IRR of a publicly traded index over the same period. This comparison is complicated because:
Select an option first.
Correct answer: B — IRR uses the timing of private cash flows, while public index returns assume continuous investment and reinvestment, making them structurally different
Explanation: B is correct: Private equity IRR is a time-weighted internal rate of return based on actual irregular cash flows. A public index return assumes continuous full investment. The Public Market Equivalent (PME) was developed specifically to make fair comparisons by replicating the private fund's cash flow timing in the public market. A is wrong because outperformance is not guaranteed. C and D are irrelevant.
Get the full CFA question bank — free
Drop your email and we'll send you fresh CFA practice questions, fully worked solutions and exam-deadline reminders. No spam — unsubscribe in one click.
Want to save your score and take a full mock exam? Create a free account →
Question 66
The vintage year of a private equity fund is significant because it:
Select an option first.
Correct answer: B — Marks the year the fund was first established and began investing, allowing comparison to funds formed in the same economic environment
Explanation: B is correct: Vintage year is when the fund was established and began deploying capital. Funds of the same vintage year faced similar macroeconomic and market conditions, making them directly comparable. Comparing a 2009 vintage fund to a 2000 vintage fund would be misleading because one benefitted from post-crisis asset prices and the other invested at peak valuations. A, C, and D are incorrect.
Question 67
Which of the following best distinguishes 'committed capital' from 'paid-in capital' in a private equity fund?
Select an option first.
Correct answer: B — Committed capital is the total the LP has pledged to invest over the fund's life; paid-in capital is the amount actually drawn so far
Explanation: B is correct: LPs commit a total amount upfront but contribute it only as the GP issues capital calls over time. Early in a fund's life, paid-in is much smaller than committed. By end of the investment period, paid-in typically approaches committed capital (minus unfunded amounts if any investments were cancelled).
Question 68
A private equity fund is said to have 'recycled' capital when it:
Select an option first.
Correct answer: B — Uses proceeds from early exits or realisations to make additional investments without calling new capital from LPs
Explanation: B is correct: Recycling allows the GP to redeploy realised proceeds back into new investments rather than distributing them to LPs. This keeps capital working without additional calls. Recycling provisions are typically defined in the LPA. A is the opposite (distributions sent out). C is a secondary transaction. D is a restructuring of fund economics.
Question 69
A fund of funds in private markets primarily differs from a direct private equity fund in that it:
Select an option first.
Correct answer: B — Invests in other private market funds rather than directly in operating companies, providing diversification across GPs, strategies, and vintage years
Explanation: B is correct: A fund of funds pools investor capital and deploys it across multiple underlying private funds managed by different GPs. This creates diversification but adds an additional fee layer. A is wrong because a FoF is entirely in private markets. C is wrong because FoFs charge both a management fee and carried interest. D is wrong because FoFs are subject to regulatory requirements.
Question 70
In a private equity fund, the 'management fee' is typically calculated on:
Select an option first.
Correct answer: B — Committed capital during the investment period and sometimes on invested (deployed) capital thereafter
Explanation: B is correct: Management fees (typically 1.5–2% per annum) are calculated on committed capital during the investment period, giving the GP predictable income. After the investment period, the base often switches to invested (cost) capital as commitments are drawn down and the portfolio matures. A, C, and D are not the standard fee base.
Question 71
A private equity GP earns carried interest of 20% with a hurdle rate of 8% and a 100% catch-up provision. In the distribution waterfall, after LPs receive their 8% preferred return, the next step is:
Select an option first.
Correct answer: B — The GP receives 100% of profits until it has received 20% of all profits distributed thus far (the catch-up)
Explanation: B is correct: The catch-up clause allows the GP to receive the next tranche of profits entirely (100% catch-up) until the total carry equals 20% of all distributions made so far. This puts the GP and LP on the agreed 80/20 split retrospectively. A is wrong because the 80/20 split only begins after the catch-up is complete. C happens earlier (capital return). D is wrong because management fees are ongoing expenses, not a waterfall step.
Question 72
The 'clawback' provision in a private equity fund protects limited partners by:
Select an option first.
Correct answer: B — Requiring the GP to return previously received carried interest if subsequent losses mean total carry exceeded the contractually agreed percentage
Explanation: B is correct: If a fund makes early strong exits (generating carry for the GP) but later investments underperform, the GP may have received more carry than contractually justified when viewed across the fund's life. The clawback forces the GP to return excess carry to LPs. A, C, and D are not the purpose of clawback.
Question 73
A 'European waterfall' in a private equity fund distributes carried interest to the GP:
Select an option first.
Correct answer: B — Only after LPs have received back all contributed capital plus the preferred return across the entire fund
Explanation: B is correct: The European waterfall (also called whole-fund waterfall) requires that LPs receive all capital back plus the hurdle return across the whole portfolio before the GP receives any carry. This is more LP-friendly. The alternative American waterfall pays carry on a deal-by-deal basis.
Question 74
The primary reason institutional investors (such as pension funds) might prefer to invest through private equity funds rather than making direct investments in private companies is:
Select an option first.
Correct answer: B — Private equity funds provide access to experienced GPs with deal flow, operational expertise, and established management teams that most LPs lack
Explanation: B is correct: Most institutional investors lack the in-house deal teams, sector expertise, and operator networks required for successful direct private investing. GP relationships provide curated deal flow and value-added management. A is wrong because direct investing actually avoids the fee layer. C is wrong because direct investing may have fewer regulatory requirements. D is wrong because diversification reduces but does not eliminate risk.
Question 75
In private markets, 'co-investment' rights given to LPs allow them to:
Select an option first.
Correct answer: B — Invest directly alongside the fund in specific deals, often at reduced or zero fees
Explanation: B is correct: Co-investment rights allow favoured LPs to invest directly into specific portfolio companies alongside the main fund. These allocations are typically offered with no management fee and no carry (or at reduced rates), representing an attractive deal enhancement for LPs. A is wrong because LPs don't have company-level voting rights in most structures. C is a secondary market transaction. D is wrong because LPs do not earn carry — that's the GP's compensation.
Question 76
The 'GP commitment' (or 'skin in the game') in a private equity fund refers to:
Select an option first.
Correct answer: B — The GP's own capital invested in the fund alongside LPs, aligning GP and LP interests
Explanation: B is correct: GPs typically commit 1–3% of total fund capital alongside LPs. This ensures GPs bear real losses if investments underperform rather than just losing fee income. This is a critical alignment mechanism demanded by institutional LPs. A, C, and D are not the definition of GP commitment.
Question 77
A private equity fund manager who is raising their fifth fund typically has an advantage over a first-time manager because:
Select an option first.
Correct answer: B — They have a verifiable track record across multiple funds, established LP relationships, a proven team, and demonstrated operational processes
Explanation: B is correct: Track record, team stability, and existing LP relationships (who can recommit) are substantial advantages for established managers. First-time managers face significant headwinds in fundraising even if individual team members have experience elsewhere. A is wrong because fund number alone doesn't guarantee performance. C is wrong because fund size often hurts returns. D is wrong.
Question 78
An investor compares the reported returns of a private equity fund to those of a public equity index. She notes that the private fund appears to have lower volatility. The most likely explanation is:
Select an option first.
Correct answer: B — Private fund values are based on periodic appraisals that smooth out mark-to-market fluctuations, creating the appearance of lower volatility (known as 'stale pricing')
Explanation: B is correct: Private fund NAVs are set by fund managers using valuation models (often quarterly) rather than continuously by market forces. This smoothing effect understates true volatility. Academic research has shown that true economic volatility of private assets likely resembles public markets more closely than reported numbers suggest.
Question 79
The risk that a private fund manager cannot find suitable investments during the investment period, leaving committed capital undeployed, is called:
Select an option first.
Correct answer: C — Deployment risk (or capital overhang risk)
Explanation: C is correct: If the market has too many buyers competing for deals (a period of capital overhang), GPs may struggle to deploy capital at attractive prices. Undeployed capital earns the fund no return and wastes the investment period. A is broad market price risk. B is the risk of having too few holdings. D is the risk of a trading partner defaulting.
Question 80
In private equity, 'key-man risk' refers to the risk that:
Select an option first.
Correct answer: B — The fund's investment performance is heavily dependent on one or a few critical individuals, whose departure would impair the fund's management
Explanation: B is correct: Many private equity funds are built around the track record and expertise of one or two lead partners. The departure of these individuals could seriously harm deal sourcing, company relationships, and portfolio management. LPAs typically include key-man provisions that allow LPs to suspend capital calls or even terminate the fund if key individuals leave.
Question 81
A diversified private markets portfolio that includes equity, credit, real estate, and infrastructure is best described as providing:
Select an option first.
Correct answer: B — Exposure across different return drivers, risk profiles, and economic sensitivities, reducing reliance on any single strategy
Explanation: B is correct: Different private asset classes have different cash flow profiles, risk drivers, and economic sensitivities. Infrastructure offers stable regulated income, real estate provides yield and appreciation, private equity offers high growth, and private credit offers income with seniority. Combining them reduces concentration risk. A, C, and D are incorrect.
Question 82
The 'denominator effect' in private investing occurs when:
Select an option first.
Correct answer: B — A fall in public market asset values reduces the total portfolio, causing private asset allocations (slow to reprice) to appear above target, forcing institutional investors to sell or reduce private commitments
Explanation: B is correct: During market crashes (e.g., 2008, 2020), public equity portfolios fall quickly while private assets take time to re-price. The ratio of private assets to total portfolio rises above target, sometimes forcing LPs to reduce new private commitments or sell fund interests in secondary markets. A, C, and D are incorrect.
Question 83
Private market investments are typically most appropriate for investors who have:
Select an option first.
Correct answer: B — A long investment horizon, tolerance for illiquidity, and sufficient assets to meet day-to-day obligations from other sources
Explanation: B is correct: Private market investments are multi-year commitments with very limited ability to exit early. They suit sophisticated investors (pension funds, endowments, sovereign wealth funds, family offices) with long time horizons who can meet their liquidity needs from other, more liquid parts of their portfolio.
Question 84
When evaluating a private fund manager, which of the following is considered the most reliable indicator of future performance relative to peers?
Select an option first.
Correct answer: C — Attribution analysis showing whether past returns came from deal sourcing, operational improvement, or financial leverage
Explanation: C is correct: Understanding where returns came from (sourcing edge, value creation through operations, or financial engineering) helps predict whether those capabilities will persist. If returns came mainly from cheap leverage that is no longer available, future performance may differ. A is marketing. B shows accounting values but not skill attribution. D is strategy intent, not execution evidence.
Question 85
A 'blind pool' in private fund investing means that investors:
Select an option first.
Correct answer: B — Commit capital without knowing in advance which specific investments the fund will make
Explanation: B is correct: Most private equity funds are blind pools — LPs commit capital based on the GP's strategy and track record without seeing the specific investments. The GP then selects and makes investments during the investment period. This is different from a co-investment or deal-by-deal structure where LPs evaluate each opportunity.
Question 86
In private fund documentation, the 'Limited Partnership Agreement' (LPA) is:
Select an option first.
Correct answer: B — The governing legal contract between the GP and LPs defining all terms, rights, obligations, fees, waterfall mechanics, and key-man provisions
Explanation: B is correct: The LPA is the primary legal contract of a private fund. It defines every aspect of the relationship between GP and LP — capital commitment obligations, fee structures, carried interest mechanics, distribution waterfalls, investment restrictions, reporting requirements, and investor rights. The PPM (Private Placement Memorandum) is the marketing document.
Question 87
A private fund's 'drawdown period' (or investment period) typically refers to:
Select an option first.
Correct answer: B — The period during which the GP can call capital from LPs to make investments, usually 3–6 years from fund formation
Explanation: B is correct: The investment period is when the GP identifies and makes investments, calling capital from LPs as needed. After this period ends, the GP can no longer call capital for new investments (only for fees or follow-on investments in existing portfolio companies). The fund then enters its harvest period as it works toward exits.
Question 88
Secondary market transactions for limited partnership interests primarily allow:
Select an option first.
Correct answer: B — LPs to sell their fund interests to other investors before the fund's natural termination, providing liquidity that is otherwise unavailable in private markets
Explanation: B is correct: The secondary market allows LPs who need liquidity to sell their LP interest (including unfunded commitments and rights to future distributions) to secondary buyers at a negotiated price. These transactions typically occur at a discount to NAV. The GP must usually consent to transfers. A is wrong because LPs cannot force capital returns. C and D are incorrect.
Question 89
A private equity fund 'extension' beyond its stated fund life typically requires:
Select an option first.
Correct answer: B — Approval from a majority or supermajority of LPs, as defined in the LPA, often in one or two annual increments
Explanation: B is correct: Fund lives are typically 10 years but can be extended by 1–2 years with LP consent. Extensions allow the GP time to complete exits without forcing fire-sale disposals at poor prices. LPs typically prefer an orderly exit over being forced into a rushed sale. LPA terms specify the voting threshold required for extension approval.
Question 90
An 'Advisory Board' in a private equity fund typically:
Select an option first.
Correct answer: B — Represents LP interests on matters such as conflicts of interest, related-party transactions, and valuation disputes
Explanation: B is correct: The LP Advisory Board (LPAC) is typically composed of representatives from larger or anchor LPs. It reviews and resolves conflicts of interest, approves related-party transactions, and provides oversight without making investment decisions (which remain entirely the GP's responsibility). A and C are wrong because the LPAC is advisory, not managerial. D is wrong because poor performance triggers specific remedies, not automatic GP replacement.
More free CFA topics
Economics2,066
Quantitative Methods1,213
Portfolio Management1,079
Fixed Income908
Financial Statement Analysis904
Corporate Issuers884
Portfolio Construction605
Alternative Investments540
Asset Allocation499
Derivatives498
Equity390
Performance Measurement295
Specialized Pathway - Portfolio Management253
Derivatives and Risk Management131
Ten questions in
- The ones you miss are saved as a drill you can repeat
- Your place is kept, on this device and any other
- A streak, if that is the thing that gets you back tomorrow
Every question on this page stays free and open either way.