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 91
In private fund structuring, an 'offshore feeder fund' is typically used to:
Select an option first.
Correct answer: B — Allow non-US investors or tax-exempt US investors to participate in a fund in a tax-efficient manner, without generating effectively connected income
Explanation: B is correct: Offshore feeders (e.g., Cayman Islands vehicles) aggregate foreign investors and certain tax-exempt US investors (pension funds, endowments) into the main fund in a structure that avoids generating taxable income in the investors' home jurisdictions. A, C, and D are incorrect.
Question 92
A 'no-fault divorce' provision in a limited partnership agreement allows:
Select an option first.
Correct answer: B — A supermajority of LPs to remove the GP without cause or proof of misconduct
Explanation: B is correct: A no-fault divorce provision is a significant investor protection that allows LPs (with sufficient voting power, often 75%+) to replace a GP even absent malfeasance. This is rarely used but provides an important check on GP behaviour, particularly in newer fund vintages. A, C, and D are incorrect.
Question 93
An institutional investor that commits to new private equity funds every year across different vintage years is practising:
Select an option first.
Correct answer: B — Vintage-year diversification, reducing exposure to any one economic cycle's impact on fund entry valuations
Explanation: B is correct: Because fund performance depends heavily on when investments were made (entry valuations, economic conditions at deployment), spreading commitments across multiple years reduces the risk of having all capital deployed in peak-valuation years. This is a cornerstone of institutional private markets portfolio construction.
Question 94
An investor committed $10 million to a private equity fund. After 3 years, the fund has called $6 million. The remaining $4 million that the investor has pledged but not yet sent to the fund is called:
Select an option first.
Correct answer: B — Uncalled capital (or dry powder from the LP perspective)
Explanation: B is correct: Uncalled capital (sometimes called unfunded commitment) is the portion of the total commitment that the LP has pledged but the GP has not yet drawn. The LP must hold this capital in liquid, accessible investments until it is called — creating the cash drag problem in private market investing. A, C, and D are incorrect.
Question 95
A private equity firm's 'portfolio company' is best defined as:
Select an option first.
Correct answer: B — A company that the fund has acquired or invested in as part of its private market strategy
Explanation: B is correct: Portfolio companies are the operating businesses that the fund has invested in. The GP works to improve these businesses during the holding period before seeking an exit. They are not public companies (in most cases), not other funds, and not companies merely sharing investors.
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 96
In private markets, the 'mark-to-market' method of valuation would be LEAST appropriate for:
Select an option first.
Correct answer: B — A controlling interest in a private industrial company that was last valued 6 months ago during the acquisition
Explanation: B is correct: A controlling stake in a non-listed private company has no daily market price. It must be valued using methods such as DCF, comparable company multiples, or comparable transaction multiples — not mark-to-market. For liquid instruments (A, C, D), observable market prices are available and should be used.
Question 97
When valuing a private company using the 'comparable transactions' method, the analyst uses:
Select an option first.
Correct answer: B — Transaction multiples from recent acquisitions of similar companies in the same industry to estimate what an acquirer would pay
Explanation: B is correct: Comparable transaction analysis uses multiples (e.g., EV/EBITDA) from recently closed M&A deals involving similar companies, adjusted for differences in size, growth, and profitability. These transaction multiples include a control premium paid by acquirers, making them typically higher than trading multiples. A, C, and D are other valuation methods, not comparable transactions.
Question 98
A private equity portfolio company has EBITDA of $50 million and the fund values it using a comparable company EV/EBITDA multiple of 8x. The estimated enterprise value is:
Select an option first.
Correct answer: C — $400 million
Explanation: C is correct: Enterprise Value = EBITDA × Multiple = $50M × 8x = $400M. This is the total estimated value of the business including debt. To get equity value, you would subtract net debt. A is just EBITDA. B is 4× EBITDA. D is EBITDA/multiple (inverted calculation).
Question 99
Which of the following best describes why private equity fund managers are said to 'mark up' NAV conservatively?
Select an option first.
Correct answer: B — Fund managers often apply conservative valuation assumptions to protect themselves against write-downs later, which can create a 'hidden' buffer of unrealised value that becomes visible when assets are exited
Explanation: B is correct: GPs typically prefer to avoid marking up NAV too aggressively because subsequent write-downs damage LP confidence. By being conservative, they sometimes exit investments above carrying value, showing positive surprise. Critics note this can also obscure fund quality. A, C, and D are incorrect.
Question 100
Discounted Cash Flow (DCF) valuation for a private company estimates intrinsic value by:
Select an option first.
Correct answer: B — Projecting the company's future free cash flows and discounting them back to present value using an appropriate discount rate reflecting risk
Explanation: B is correct: DCF is based on the fundamental principle that an asset's value equals the present value of all cash flows it will generate. For private companies, projected FCF is discounted using WACC. A describes a trading comparables approach. C is a secondary market approach. D is an asset-based approach.
Question 101
In private market investing, ESG (Environmental, Social, Governance) integration is most relevant because:
Select an option first.
Correct answer: B — Private equity funds have direct influence over portfolio company operations and can actively drive ESG improvements, which may reduce long-term risks and enhance value
Explanation: B is correct: Unlike public market investors who are passive price-takers, private equity GPs have significant operational control and board representation. They can directly implement ESG policies that reduce regulatory risk, improve employee retention, lower energy costs, and make portfolio companies more attractive to acquirers or public market investors at exit.
Question 102
A private fund manager that integrates ESG factors into its investment due diligence process would most likely examine which of the following for a manufacturing company target?
Select an option first.
Correct answer: B — The target's environmental compliance history, workforce safety record, and board diversity
Explanation: B is correct: ESG due diligence for a manufacturer focuses on environmental risks (pollution, waste, regulatory fines), social factors (safety incidents, labour practices, supply chain standards), and governance (board composition, management incentives, financial controls). A, C, and D are irrelevant to ESG assessment.
Question 103
Working capital is calculated as:
Select an option first.
Correct answer: B — Current assets minus current liabilities
Explanation: B is correct: Working capital = Current Assets − Current Liabilities. It measures the short-term operational liquidity of a business — whether it can meet its near-term obligations with its near-term assets (cash, receivables, inventory). A is net assets (equity). C is the long-term asset/liability comparison. D is a component of free cash flow calculation.
Question 104
Return on Equity (ROE) is calculated using which formula?
Select an option first.
Correct answer: B — (Net Income ÷ Shareholders' Equity) × 100
Explanation: B is correct: ROE = Net Income ÷ Shareholders' Equity. It measures how effectively management generates profit from the equity capital invested by shareholders. A is Return on Assets (ROA). C is a coverage ratio variant. D is an asset turnover variant using equity.
Question 105
A company has total assets of $200 million and total liabilities of $120 million. Its book value of equity is:
Select an option first.
Correct answer: B — $80 million
Explanation: B is correct: Book Equity = Total Assets − Total Liabilities = $200M − $120M = $80M. This is the accounting value of equity on the balance sheet. A is total liabilities. C is the sum of assets and liabilities. D is total assets only.
Question 106
EBITDA is commonly used as a proxy for operating cash flow in private equity analysis primarily because:
Select an option first.
Correct answer: B — It strips out non-cash charges (depreciation, amortisation) and capital structure effects (interest, tax), making businesses with different financing structures comparable on an operating basis
Explanation: B is correct: By excluding interest (capital structure), taxes (jurisdiction-dependent), depreciation and amortisation (non-cash, varies by asset base), EBITDA allows comparison of the underlying operating profitability of businesses regardless of how they are financed or what their asset base looks like. A is wrong because EBITDA excludes capex changes. C and D are incorrect.
Question 107
Gross margin is calculated as:
Select an option first.
Correct answer: B — Revenue minus cost of goods sold (COGS), divided by revenue
Explanation: B is correct: Gross Margin = (Revenue − COGS) ÷ Revenue. It shows how much profit remains after the direct costs of producing goods or services, before overhead, interest, and taxes. A is the net profit margin. C inverts the relationship. D includes more expenses than just COGS, making it an operating margin calculation.
Question 108
Debt-to-EBITDA is a ratio commonly used in private equity leveraged buyouts to measure:
Select an option first.
Correct answer: B — The level of financial leverage relative to operating earnings — how many years of EBITDA it would take to repay all debt
Explanation: B is correct: Debt/EBITDA shows how leveraged a company is and, roughly, how long it would take to repay debt from operations. A ratio of 5× means 5 years of EBITDA would be needed. Leveraged buyouts often enter at 4–7× and aim to reduce leverage through earnings growth and debt repayment over the holding period.
Question 109
Free cash flow (FCF) to the firm is most accurately calculated as:
Select an option first.
Correct answer: B — EBITDA minus taxes, changes in working capital, and capital expenditures
Explanation: B is correct: FCF to the firm = EBITDA − Taxes − ΔWorking Capital − Capex. This represents the cash a business generates that is available to all capital providers (debt and equity). A approximates operating cash flow but misses capex and working capital. C is operating income. D is retained earnings.
Question 110
In the context of leveraged buyouts, 'EBITDA margin expansion' refers to:
Select an option first.
Correct answer: B — Growing EBITDA as a percentage of revenue over the holding period, which increases the company's multiple at exit
Explanation: B is correct: If EBITDA margin increases from 20% to 25% during the holding period, the same revenue base generates more EBITDA — and since companies are often valued on EBITDA multiples, this improvement drives valuation higher. This is one of the key value creation levers in private equity. A is the opposite. C would harm valuation. D is financial engineering, not margin expansion.
Question 111
Which of the following best describes a 'closed-end' fund structure common in private equity?
Select an option first.
Correct answer: B — The fund has a fixed pool of capital raised during a defined fundraising period, a fixed investment period, and a defined fund life after which assets are liquidated and capital returned
Explanation: B is correct: Closed-end funds have a fixed capital raising period (they 'close' to new investors), deploy capital during the investment period, and have a fixed fund life (typically 10 years). This structure provides GPs with stable capital to make long-term investments without worrying about investor redemptions. A describes open-end funds. C and D are characteristics of mutual funds or hedge funds.
Question 112
An 'open-end' private market fund structure (such as some core real estate and infrastructure funds) differs from a closed-end structure in that:
Select an option first.
Correct answer: B — Open-end funds allow ongoing capital subscriptions and redemptions, providing more liquidity than closed-end funds, though redemptions may be gated during market stress
Explanation: B is correct: Open-end (or evergreen) structures in real assets allow institutional investors to invest and (with notice) withdraw capital continuously. The fund does not terminate on a fixed date. These are common for core real estate and infrastructure funds targeting stable income. However, they may gate redemptions when many investors withdraw simultaneously, causing liquidity issues.
Question 113
When investing in a private equity fund targeting emerging market countries, an investor faces 'currency risk', which refers to:
Select an option first.
Correct answer: B — The risk that changes in exchange rates between the investment's local currency and the investor's home currency will affect the return in home currency terms
Explanation: B is correct: If an investment earns a 15% return in Brazilian reais but the real depreciates 20% against the US dollar, the USD investor experiences a negative return. Currency risk is a key consideration in cross-border private investing and can be hedged (at a cost) or left unhedged depending on strategy.
Question 114
'Political risk' in international private market investing refers to:
Select an option first.
Correct answer: B — The risk that government actions such as expropriation, nationalisation, regulatory changes, or political instability will adversely affect the investment
Explanation: B is correct: Political risk encompasses the possibility that a country's government will act in ways that harm investors — seizing assets, changing ownership rules, imposing capital controls, or creating political instability that disrupts business. It is especially relevant for infrastructure and natural resource investments in developing countries.
Question 115
An investor notes that legal systems that strongly protect creditor and minority shareholder rights tend to attract more private market capital. This is because:
Select an option first.
Correct answer: B — Strong legal rights reduce the risk of unfair treatment, contract breach, and expropriation, making investors more willing to commit illiquid capital for long periods
Explanation: B is correct: The protection of contractual rights (creditors can enforce debt claims, minority shareholders cannot be unfairly diluted, and contracts will be upheld by courts) reduces the risk of investing and is a key determinant of private market capital flows across geographies.
Question 116
Which of the following best describes the 'investment mandate' of a private equity fund?
Select an option first.
Correct answer: B — The document defining the fund's permitted investment strategy, sector focus, geographic scope, company size range, and any restrictions, which the GP must follow when deploying capital
Explanation: B is correct: The investment mandate in the LPA or PPM sets boundaries within which the GP must operate. For example, 'invest in European mid-market buyouts between €50M and €500M enterprise value in technology, healthcare, and consumer sectors.' The GP cannot deviate significantly from this mandate without LP approval. A is regulatory reporting. C is the capital call obligation. D is fee entitlement.
Question 117
An LP who 'defaults' on a capital call in a private equity fund is most likely to face:
Select an option first.
Correct answer: B — Significant financial penalties including dilution of their ownership interest, forfeiture of prior distributions, or forced sale of their interest at a discount, as defined in the LPA
Explanation: B is correct: LPAs include strict default provisions because the GP relies on capital calls to fund investments. A defaulting LP may: (1) lose their pro-rata share of future profits, (2) have their interest diluted, (3) forfeit prior distributions back to the fund, or (4) be forced to sell at a steep discount. These provisions are intentionally punitive to deter defaults. A, C, and D are incorrect.
Question 118
The 'portfolio company' reporting obligations to a private equity fund typically include:
Select an option first.
Correct answer: B — Monthly or quarterly financial statements (income statement, balance sheet, cash flow), operating metrics, and management commentary enabling the GP to monitor performance and model exit scenarios
Explanation: B is correct: PE-backed companies must provide regular detailed financial reporting to their GP investors. This is far more extensive than what a public company's minority investors receive. GPs use this information to monitor performance against the business plan, identify problems early, and prepare for exit processes. A, C, and D are incorrect.
Question 119
A private equity GP who charges fees for 'deal sourcing' (origination fees) from portfolio companies is subject to scrutiny because:
Select an option first.
Correct answer: B — These fees are a potential conflict of interest — the GP earns income from portfolio companies while also managing the fund whose LPs' interests should be paramount; many LPAs require these fees to be offset against management fees
Explanation: B is correct: Transaction fees (deal fees, monitoring fees, board fees) paid by portfolio companies to the GP create a conflict — the GP benefits from the relationship with the company, which should benefit the LP investors. Modern LPAs typically require 50–100% of such fees to be credited back to the management fee, reducing the fee paid by LPs.
Question 120
The 'J-curve effect' is most pronounced in which type of private market fund?
Select an option first.
Correct answer: B — A newly launched fund in its first two years, when management fees are being charged but no exits have occurred yet
Explanation: B is correct: The J-curve is steepest at the start — management fees and expenses are paid from the first day while investments are just being deployed. No exits occur for several years. The early negative returns are most concentrated for brand new funds. A is in harvest phase (positive). C has diversification across vintage years. D (secondary funds) often show a reduced J-curve because they purchase assets at discounts and may receive near-term distributions.
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.