Commitments, structures and honest private-fund metrics

Learning goals

• Diagnose the case using the stated constraints and quantitative evidence.
• Defend a conditional decision and identify what further evidence could reverse it.

Draft · approximately 95 minutes, excluding further revision.

Decision case · fictional facts

An LP commits 50 m, has paid in 30 m, received 12 m distributions and holds 24 m reported residual NAV.The fund has a ten-year intended term with extensions and no promised redemption. The LP considers replacing public stocks with this position.

Structure shapes access and control

Private assets can be held directly, through closed-end funds, co-investments, separately managed accounts or secondary interests. Each changes control, diversification, governance, fees and diligence demands. Commitment is not identical to invested NAV; uncalled commitments are contingent liquidity needs. Transfer restrictions and manager discretion can persist through a long holding period.

Use multiples and time-aware comparisons

DPI=distributions/paid-in; RVPI=residual value/paid-in; TVPI=(distributions+residual)/paid-in. Multiple metrics do not capture timing and residual values are estimates. IRR is cash-flow timing-sensitive and can be influenced by financing and early distributions. Compare vintage, strategy, risk and a defensible public-market equivalent where data support it; do not compare a private IRR mechanically with a stock index annual return.

Allocation must finance uncertain calls

Private-public differences include information access, valuation frequency, liquidity, governance and operational leverage. Smoothed valuations can understate observed volatility and correlations. Allocate using stressed cash calls and true economic exposures; do not count a contractual commitment as a liquid asset or assume an illiquidity premium is guaranteed.

Choose access by capability and control needs

Direct ownership gives greater influence but requires sourcing, governance and concentration capacity. A fund delegates investment decisions and diversifies across holdings but adds fees and manager dependence. Co-investment can reduce some fund fees yet concentrate deal risk. Secondary purchases can shorten remaining life and reveal assets, but pricing and transfer consent still require diligence.

Reconcile a subscription line with investor returns

Fictional one-year investment: a fund buys an asset for 10 m at time 0 and sells it for 12 m at time 1. Without a subscription line, the LP pays 10 m at time 0 and receives 12 m at time 1. With a line, the bank advances 10 m at time 0; the LP pays 10.3 m at time 0.5, immediately repaying principal and 0.3 m financing cost, and receives 12 m at time 1. Ignore all other fees, taxes and cash flows.

Compare annualized investor IRR, investor multiple and investor cash profit under the two arrangements. Explain why a higher reported IRR would not prove the underlying asset investment was more profitable. These numbers are a constructed exercise, not a recommendation to borrow.

Model reasoning, sensitivity and self-check

Without financing: investor IRR = 12/10−1 = 20%, multiple = 1.20 and cash profit = 2 m. With financing: the LP invests for half a year, so annualized IRR = (12/10.3)^2−1 = 35.7338%; multiple = 12/10.3 = 1.165049 and cash profit = 1.7 m. Delaying the LP cash outflow raises this IRR even though financing costs reduce the LP’s cash gain and multiple.

The underlying asset still earns 2 m before financing. For comparability, request the actual LP cash-flow calendar, line balance and costs, the cash-flow start date used, and returns calculated consistently with and without the facility. Do not annualize the 16.5049% half-year holding-period return by merely doubling it when an effective compounded annual rate is requested.

Self-check: identify whose return is measured and align time units. This case has a single negative and positive LP cash flow; complex private-fund cash flows can create IRR interpretation or uniqueness problems. Compare timing-aware benchmarks and economic profit alongside the annualized headline.

Formula and assumptions

DPI=D/PIC;RVPI=NAV/PIC;TVPI=DPI+RVPI

Errors to catch

• Treating residual NAV as realized cash.

Write, compare, then self-assess

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Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.

• Reference · www.investor.gov
• Reference · www.cfainstitute.org
• Reference · ilpa.org