CFA Level I · CFA Level I Exam

Investments in Private Capital: Equity and Debt

Private capital covers private equity (venture capital and buyouts) and private debt (direct lending, mezzanine, distressed, venture debt). You learn how funds are structured, how fees and terms work, how holdings are valued and exited, and how returns are measured. Solve questions by identifying the strategy first, then applying the right rule or metric.

What this chapter covers

This chapter covers investments that are not traded on public markets. Private equity means ownership stakes in companies that are not publicly listed. Private debt means loans made outside the public bond market. You study strategies, fund structure, fees and terms, valuation, exits, performance metrics, and the risk and return profile of private debt.

It sits inside the Alternative Investments topic and builds on ideas from other parts of the paper. Fees and carried interest connect to portfolio management. Valuation links to equity valuation and corporate finance. Return metrics such as IRR link to the time value of money in Quantitative Methods. Credit risk in private debt links to Fixed Income.

Most questions are conceptual, with a few short calculations. Expect to compare strategies, spot the correct fee or governance term, and read a performance metric correctly. Learn the vocabulary precisely, because many wrong options differ from the right one by one word.

Alternative Investments is one of the lighter-weighted topics on the 2027 Level I exam, at 6-9%, but this chapter has clear, rule-based content that rewards memorisation and careful reading. Terms like hurdle rate, clawback and J-curve are tested directly, and the three-option format means a precise definition lets you eliminate two choices fast. With no penalty for wrong answers and no minimum score per topic, every correct answer here adds to your total, and these marks are easier to win than long calculations elsewhere.

Investments in Private Capital: Equity and Debt: topics in the order to study them

1Private Equity Strategies and StructureStart here because it defines venture capital, buyouts and the fund structure that every later topic assumes.
2Private Equity Fees, Terms and GovernanceFees and terms only make sense once you know who the general partner and limited partners are.
3Private Equity Valuation and Exit RoutesValuation and exits show how a fund turns investments into cash, which feeds the return metrics.
4Private Equity Performance and Returns MetricsMetrics such as IRR and multiples need the cash flow pattern, fees and exits from the earlier topics.
5Private Debt Types and CharacteristicsMove to debt once equity is secure, so you can contrast lenders with owners and learn the loan types.
6Private Debt Risks, Returns and DiversificationFinish with risk and return, which compares private debt with public bonds and private equity.

How to prepare Investments in Private Capital: Equity and Debt

Treat this chapter as a vocabulary and logic chapter with a few calculations. Build the structure first, then practise applying it.

Draw the fund structure on one page: general partner, limited partners, committed capital, drawdowns, distributions. Explain it aloud without notes.
List each private equity strategy with its stage, use of leverage and typical risk. Be able to tell a venture capital deal from a leveraged buyout in one sentence.
Make a fee and terms sheet: management fee, carried interest, hurdle rate, waterfall, clawback, key person and no-fault provisions. Write what each protects and who it favours.
Practise valuation and exit routes by matching each exit (IPO, secondary sale, recapitalisation, write-off) to the situation where it fits.
Work through return metrics with small cash flow examples. On the BA II Plus, enter flows with CF, then press IRR and CPT. Check the sign of each flow before you compute.
Build a table comparing private debt types by seniority, security, return source and main risk. Then answer practice questions and note why each wrong option fails.

Common mistakes in Investments in Private Capital: Equity and Debt

Mixing up the general partner and limited partners
Fix: Remember that the general partner manages the fund and, in a traditional limited partnership structure, bears unlimited liability. Limited partners provide capital and have liability limited to their committed capital.
Treating committed capital as money already invested
Fix: Committed capital is the promised amount. Investors fund it in drawdowns over time, so paid-in capital is usually smaller early on.
Confusing the hurdle rate with carried interest
Fix: The hurdle is a return threshold. Carry is the profit share paid only after that threshold is met, depending on the waterfall terms.
Judging performance by multiples alone
Fix: Remember that multiples ignore timing. Compare them with IRR, and check whether the question asks about timing or total value.
Assuming all private debt is risky, equity-like lending
Fix: Separate senior direct lending, which is secured and higher in the capital structure, from mezzanine and distressed debt, which carry more risk and higher return potential.
Missing one-word differences between options
Fix: Underline the key term in the stem, eliminate the option that contradicts a definition, then compare the last two carefully.

Last-day revision: Investments in Private Capital: Equity and Debt

Private equity funds are usually limited partnerships run by a general partner, with investors as limited partners.
Committed capital is called down as drawdowns, and cash comes back later as distributions.
Venture capital funds early-stage companies; buyouts acquire mature companies, often with heavy leverage.
Management fees are based on committed or invested capital; carried interest is a share of profits.
A hurdle rate is the return the fund must beat before the general partner earns carried interest.
A clawback lets limited partners recover excess carry paid to the general partner earlier.
Typical exit routes are IPO, sale to a strategic buyer, secondary sale and recapitalisation.
The J-curve shows negative early returns because fees and costs come before gains.
IRR is money-weighted and depends on the timing of cash flows.
Multiples of invested capital ignore timing, so a high multiple can still mean a low IRR.
Private debt includes direct lending, mezzanine, venture debt and distressed debt.
Private debt is usually less liquid than public bonds, and part of its extra return compensates for that illiquidity.

Investments in Private Capital: Equity and Debt practice questions

Investments in Private Capital: Equity and Debt in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Investments in Private Capital: Equity and Debt: frequently asked questions

How much of the CFA Level I exam is this chapter?

This chapter sits within Alternative Investments, which carries a 6-9% weight on the 2027 Level I exam. Only part of that topic is private capital, so it will be a small number of questions. They are often definition-based and quick to answer if you have prepared.

Do I need to calculate IRR for private equity questions?

You should understand IRR conceptually and be able to compute it from a short cash flow series. Use your TI BA II Plus or HP 12C. Most questions focus on interpretation, such as why IRR and multiples can tell different stories.

What is the best order to study this chapter?

Study private equity first: strategies and structure, then fees and governance, valuation and exits, and performance metrics. Then study private debt types, followed by its risks and returns. This order builds each idea on the previous one.

How do I eliminate wrong options in these questions?

Every question has three options, so you only need to rule out two. Start with the strategy or loan type named in the stem, then discard any option that contradicts its basic definition. There is no penalty for a wrong answer, so always choose one.