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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 121
Private market fund performance is typically reported on a 'net' basis, meaning:
Select an option first.
Correct answer: B — After deducting management fees and carried interest, reflecting the actual return received by LP investors
Explanation: B is correct: Net IRR and net TVPI reflect the returns LPs actually earn after paying management fees (typically 1.5–2% per year) and carried interest (typically 20% of profits). Gross returns reflect the fund's investment performance before fees. The difference between gross and net can be 3–6% per year, making net returns the meaningful metric for LPs.
Question 122
In private markets, 'time-weighted return' (TWR) versus 'money-weighted return' (MWR) differ in that:
Select an option first.
Correct answer: B — TWR eliminates the effect of external cash flows (capital calls and distributions) and reflects the manager's investment skill; MWR (IRR) is affected by the timing and size of cash flows, making it a measure of investor experience
Explanation: B is correct: For private funds where the manager controls the timing of capital calls and distributions (unlike public funds where investors can add/withdraw freely), IRR (a money-weighted measure) is the standard because it captures the actual investor experience including timing. TWR would be used to assess the manager's stock-picking skill independent of cash flows. A, C, and D are incorrect.
Question 123
A 'hurdle rate' (or preferred return) of 8% in a private equity fund means:
Select an option first.
Correct answer: B — LPs must earn an 8% cumulative annualised return on their invested capital before the GP is entitled to receive any carried interest
Explanation: B is correct: The hurdle rate (often 6–8% in PE) is the minimum annual return LPs must earn before the GP participates in profits. It protects LPs from paying carry on mediocre returns. If the fund earns exactly 8%, the GP receives no carry. Returns above 8% are shared (typically 80% LP, 20% GP after the GP's catch-up).
Question 124
Which of the following is NOT a typical feature of a private equity fund?
Select an option first.
Correct answer: B — Daily redemption rights allowing LPs to withdraw capital on 1 business day's notice
Explanation: B is correct: Daily redemption rights are a feature of mutual funds and open-end funds — NOT private equity. PE funds are illiquid closed-end structures. Once capital is committed, LPs cannot withdraw it until the fund distributes proceeds from exits. A, C, and D are all genuine PE fund features.
Question 125
A private equity firm that raises a new fund every 3–4 years is described as being on a regular 'fundraising cycle'. This is significant because:
Select an option first.
Correct answer: B — It creates an ongoing GP-LP relationship — LPs who are happy with the prior fund will 'recommit' to the new fund, while dissatisfied LPs may not, providing a natural performance accountability mechanism
Explanation: B is correct: The repeat fundraising cycle is one of the most important accountability mechanisms in private markets. GPs who deliver strong returns raise their next fund easily and often at larger size. Underperforming GPs struggle to raise successor funds. This creates a long-term incentive for GPs to perform, even if carried interest alignment on any single fund has weakened.
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Question 126
An institutional investor building a private markets portfolio for the first time should prioritise which of the following considerations?
Select an option first.
Correct answer: B — Establishing a pacing plan that determines annual commitment levels to build a mature, diversified portfolio over several years and avoid over-committing capital in one vintage year or one strategy
Explanation: B is correct: Building a private markets portfolio is a long-term exercise. Over-committing in the first year creates J-curve concentration and vintage year concentration. A pacing plan spreads commitments across years, strategies, and geographies, allowing the portfolio to mature with diversified cash flows. A, C, and D are suboptimal approaches.
Question 127
Secondary market transactions for private fund interests tend to occur at discounts to NAV because:
Select an option first.
Correct answer: B — The buyer faces uncertainty about the true value of the underlying assets (given infrequent valuations), gives up the upside of early vintage exposure, takes on unfunded commitments, and requires a return for providing liquidity to a seller in need
Explanation: B is correct: Secondary discounts reflect: (1) Asset valuation uncertainty, (2) Illiquidity premium for the buyer who will also be locked up, (3) Unfunded commitment risk, and (4) The seller's urgency or distress. Discounts vary from 5–50% depending on fund vintage, asset quality, and market conditions. In hot markets with strong recent performance, secondary transactions can approach or even exceed NAV.
Question 128
When a private equity fund's investment period expires, the GP typically:
Select an option first.
Correct answer: B — Can no longer make new platform investments but may retain the ability to call capital for follow-on investments in existing portfolio companies, expenses, and management fees
Explanation: B is correct: After the investment period ends, the GP cannot make brand new acquisitions (new platform investments) but can typically still call capital for: (1) Follow-on investments (existing portfolio companies needing additional capital), (2) Management fees and fund expenses, (3) Any previously approved transactions. This distinction is important for LPs managing their capital allocation.
Question 129
The net asset value (NAV) of a private equity fund is calculated as:
Select an option first.
Correct answer: B — The fair value of all portfolio investments plus cash and other fund assets, minus any liabilities (management fees payable, other expenses), representing the current estimated worth of the fund
Explanation: B is correct: NAV = Fair Value of Portfolio + Cash/Other Assets − Liabilities. It represents what the fund is worth today based on current valuations. NAV per unit is the basis for calculating RVPI and for secondary market transactions. A is paid-in capital. C is distributed value (DPI component). D is cost basis.
Question 130
In private markets, 'vintage diversification' helps an investor portfolio because:
Select an option first.
Correct answer: B — Different economic conditions at the time of investment mean that funds from different vintage years have different return profiles, and diversifying reduces the risk of having all capital invested at peak valuations
Explanation: B is correct: Funds that invested during the 2007–2008 peak paid high prices; those investing in 2009–2011 found bargain prices during the crisis. An investor committed only in 2007 suffered; one spread across multiple years fared better. This is the core rationale for vintage year diversification in private markets portfolio construction.
Question 131
A private equity general partner that invests in a company where a GP partner has a prior personal financial relationship is required to:
Select an option first.
Correct answer: B — Disclose the conflict to the LP Advisory Board and obtain approval, as required by the LPA's conflict of interest provisions
Explanation: B is correct: Related-party conflicts of interest must be disclosed and approved by the LPAC under modern LPA terms. This prevents GPs from directing fund capital toward situations where they personally benefit at the expense of LP investors. The LPAC's review role is specifically designed to catch these situations. A, C, and D are incorrect.
Question 132
An 'evergreen fund' (open-end private fund) differs from a traditional closed-end PE fund primarily in that:
Select an option first.
Correct answer: B — Evergreen funds do not have a fixed life and can continuously invest new capital as earlier investments are exited, allowing perpetual operation without a defined wind-down
Explanation: B is correct: Evergreen funds reinvest realised proceeds rather than distributing them to investors and closing. They can issue new shares/units to new investors and have redemption mechanisms. This structure is common in private credit and some real asset strategies. It avoids the fundraising cycle but creates its own governance complexity. A, C, and D are incorrect.
Question 133
The 'risk-return spectrum' in private market investing from lowest to highest expected return is most accurately described as:
Select an option first.
Correct answer: B — Infrastructure core → Real estate core → Private debt → Buyout PE → Growth equity → Venture capital
Explanation: B is correct: The general risk-return spectrum in private markets from lowest to highest is: Core infrastructure/Core real estate (6–9% IRR) → Private direct lending/Senior secured debt (8–12%) → Buyout PE (15–20%) → Growth equity (20–25%) → Venture capital (25%+ target, high failure rate). This reflects risk levels across strategies, not every fund within each category.
Question 134
A private equity firm that publicly claims strong historical returns should provide which of the following to allow proper evaluation?
Select an option first.
Correct answer: B — Audited performance information including both net and gross IRR, DPI and TVPI multiples, vintage year, fund size, number of realised versus unrealised investments, and benchmark comparisons
Explanation: B is correct: Comprehensive performance disclosure is essential for proper evaluation. Gross IRR alone misleads (ignores fees). Only showing best funds is cherry-picking. Unrealised returns are estimates. Professional investors require: net and gross returns, multiples, vintage years for context, proportion of value that is realised vs. estimated, and peer benchmarks for comparison.
Question 135
In private market fund accounting, 'paid-in capital' on the GP's books refers to:
Select an option first.
Correct answer: B — The total amount of LP capital that has actually been drawn (called) and received by the fund to date
Explanation: B is correct: Paid-in capital (also called contributed capital or called capital) is the amount LPs have actually sent to the fund in response to capital calls. It is always less than or equal to total committed capital, since the GP calls capital progressively as investments are made. A is unfunded commitments. C is GP contribution. D is distributions.
Question 136
An investor analysing a private equity fund notices that the portfolio is 75% unrealised (still held). This is most significant because:
Select an option first.
Correct answer: B — The majority of the reported NAV (and thus performance metrics like TVPI) depends on estimated valuations rather than actual realised proceeds, requiring careful assessment of valuation methods
Explanation: B is correct: When most of a fund's value is unrealised, reported performance relies heavily on the GP's valuation estimates. These estimates can be optimistic or lagged. Investors should ask: How old are the investments? What comparable transactions support the valuations? What is the DPI (realised return only)? A fund with high TVPI but low DPI has not yet proven its performance.
Question 137
When evaluating a GP's track record, 'gross-to-net return spread' is important because:
Select an option first.
Correct answer: B — A narrow gross-to-net spread may indicate low fees (better for LPs), while a wide spread could reflect high fees or high carry earned on strong performance; the spread helps LPs understand the fee burden relative to performance
Explanation: B is correct: Gross-to-net spread = Gross IRR − Net IRR. A 5% spread on a 20% gross IRR means fees and carry consume 25% of the total return. Understanding whether this spread reflects high fees on mediocre performance or well-earned carry on excellent performance is critical. LPs prefer lower-fee structures with carry only earned on genuinely strong returns.
Question 138
In private markets due diligence, 'reference checks' with former portfolio company executives are conducted because:
Select an option first.
Correct answer: B — Conversations with people who have worked with the GP team reveal how the GP actually behaves as an owner — whether they add value, how they treat management, and whether the GP's claimed value creation approach is practised in reality
Explanation: B is correct: Experienced LPs conduct thorough reference checks with CEOs, CFOs, and board members from prior portfolio companies. These reveal whether the GP truly adds value operationally, treats management fairly, behaves as a good fiduciary, and whether the GP's marketing narrative matches reality. Financial models can be manipulated; references expose behavioural patterns.
Question 139
The 'two-and-twenty' fee structure in private markets refers to:
Select an option first.
Correct answer: B — A 2% annual management fee on committed/invested capital and 20% carried interest on profits above the hurdle rate
Explanation: B is correct: '2 and 20' is the traditional private markets fee structure (though many funds now charge lower management fees): 2% per annum management fee provides operating income for the GP; 20% carried interest aligns GP incentives with LP returns by ensuring GPs earn big rewards only when performance is strong. A, C, and D invert or misstate the terms.
Question 140
A private equity fund with a 'deal-by-deal' (American) waterfall will distribute carried interest:
Select an option first.
Correct answer: B — After each individual investment is realised and shows a profit — the GP receives carry on winning deals even if subsequent deals lose money
Explanation: B is correct: The American waterfall allows GPs to collect carry on profitable deals individually, without waiting to see how other portfolio companies perform. This is more GP-friendly but potentially less LP-friendly, since the GP could collect carry on early winners while later deals lose money. The clawback provision is supposed to correct this but recovery is not always guaranteed.
Question 141
When a fund manager says a portfolio company is 'performing to plan', they mean:
Select an option first.
Correct answer: B — The company's actual revenue, EBITDA, and operational metrics are meeting or exceeding the projections made at the time of investment in the original investment thesis
Explanation: B is correct: 'Performing to plan' means the investment case is on track — revenue growth targets met, margin improvements achieved, operational milestones reached. Underperformance against the plan is an early warning sign requiring attention. GPs track performance against the investment thesis throughout the holding period.
Question 142
Which of the following statements about private equity fund size and returns is most accurate?
Select an option first.
Correct answer: B — Academic research suggests an inverted relationship — as funds grow significantly larger, performance may decline because deploying more capital in the same strategy requires accepting more (or larger) deals that may not meet prior quality standards
Explanation: B is correct: The empirical evidence on fund size and performance is nuanced, but there is general support for diseconomies of scale at the extremes. Very large funds must write larger equity checks, compete for fewer deals, or expand into new strategies. Very small funds may lack resources. Mid-size funds often show best risk-adjusted performance relative to their strategy. B is most accurate.
Question 143
A private equity firm that specialises exclusively in healthcare sector investments is described as having a:
Select an option first.
Correct answer: B — Sector-focused or specialist strategy, applying deep domain expertise in healthcare to source better deals, add more value, and attract better management teams than generalist funds in the same sector
Explanation: B is correct: Sector-specialist PE firms develop deep networks, knowledge, and operational expertise in their chosen sector. In healthcare, this means understanding regulatory approvals, reimbursement systems, clinical evidence requirements, and healthcare-specific operational levers. This expertise can provide sourcing advantages and operational value creation that generalist funds lack.
Question 144
In private market valuation, the 'control premium' refers to:
Select an option first.
Correct answer: B — The additional value attributable to owning a majority or controlling interest in a company, reflecting the ability to direct strategic decisions, appoint management, and determine the timing and method of exit
Explanation: B is correct: A controlling stake (typically 50%+ voting rights) is worth more than a minority stake in the same company because the controller can direct the business. Acquirers typically pay a 20–40% premium above the pre-acquisition minority share price (the takeover premium). This control premium is built into buyout acquisition prices.
Question 145
The 'minority discount' in private equity valuation applies when:
Select an option first.
Correct answer: B — The valuation of a minority (less than controlling) stake in a private company is reduced to reflect the lack of control, limited exit options, and inability to direct the business or force a liquidity event
Explanation: B is correct: Minority stakes in private companies are discounted versus controlling interests because: the minority investor cannot control the company's strategy, cannot force a sale, and has limited ability to monetise the investment. A minority discount of 20–35% is commonly applied in private company valuations. A, C, and D are incorrect.
Question 146
An investor evaluating private market opportunities should understand that reported NAV for illiquid assets is:
Select an option first.
Correct answer: B — An estimate based on the GP's valuation methodology and assumptions, subject to audit review but not independently verified in real time, meaning actual realised values may differ from reported NAV
Explanation: B is correct: Private asset NAVs are estimates based on models, comparable transactions, and GP assumptions. While auditors review the process and reasonableness of assumptions, they do not independently value each asset at market price. Actual exit prices frequently differ from prior NAV — sometimes higher (positive surprise), sometimes lower (write-down). This valuation uncertainty is a key risk in private markets.
Question 147
'Acceleration' of management team vesting in private equity means:
Select an option first.
Correct answer: B — Management team equity or option grants vest earlier than the normal schedule upon the occurrence of specified events (typically a change of control/sale of the company), ensuring management are fully invested as co-owners at exit
Explanation: B is correct: If a management team's equity vests over 4 years but the company is sold in year 2, single-trigger or double-trigger acceleration provisions vest the remaining equity immediately. This is important for aligning management incentives at exit — without acceleration, management might resist a sale that would leave their unvested equity worthless.
Question 148
Private market investors should be aware that the 'fee drag' from management fees in a closed-end fund most significantly affects returns when:
Select an option first.
Correct answer: B — Performance is mediocre and near the hurdle rate, where the fee drag represents a larger proportion of total returns, potentially preventing LPs from earning acceptable net returns
Explanation: B is correct: A 2% management fee on a 25% gross IRR fund represents a modest drag. But on a fund earning 10% gross, the same 2% fee represents a 20% drag on total return and reduces net to 8% (before carry). Fee drag hurts most on middle-performing funds. This is why fee negotiation and 'fee offsets' (management fees reduced by deal fees) matter more for moderate-performing strategies.
Question 149
A 'market neutral' strategy in private credit refers to:
Select an option first.
Correct answer: B — Floating-rate lending structures where the interest rate moves with market benchmarks (SOFR, LIBOR), protecting the fund from interest rate duration risk regardless of rate movements
Explanation: B is correct: Floating-rate private loans adjust their interest payments as market rates change. In a rising rate environment, loan income rises (protecting real returns). In a falling rate environment, loan income declines. This floating-rate feature makes direct lending relatively 'rate neutral' compared to fixed-rate bonds, which lose market value when rates rise.
Question 150
When a private equity fund 'marks down' the value of a portfolio company, it means:
Select an option first.
Correct answer: B — The GP has reduced the reported NAV of the investment to reflect declining performance, impaired prospects, or comparable market valuations that have fallen
Explanation: B is correct: A mark-down occurs when the GP updates the estimated fair value of a portfolio company downward. This is required when: comparable company multiples have fallen, the company is underperforming its plan, or a market event suggests the business is worth less. Mark-downs reduce the fund's NAV and TVPI. A is a realised loss. C is a headcount reduction. D is a follow-on investment.
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