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FRM Part II · FRM Exam Part II · Private Markets Investing

A buyout fund called USD 100 million at the start of year 1 and made a single distribution of USD 144 million at the end of year 2, with no other cash flows. What is the fund's IRR, and how would the IRR change if the same distribution arrived at the end of year 3?

The IRR is 20%, because 100 grows to 144 over two years at 1.2 squared. If the same 144 arrives in year 3, the IRR drops to about 12.9%, since the 1.44x multiple is earned over a longer period. IRR is sensitive to timing, unlike the multiple.

  1. A20.0%; falls to about 12.9%Correct
  2. B20.0%; stays at 20.0% because the multiple is unchanged
  3. C44.0%; falls to 14.9%
  4. D12.0%; falls to 8.9%

Explanation

For year 2: 100 x (1+r)^2 = 144, so r = 20%. For year 3: (1.44)^(1/3) - 1 = about 12.9%. The multiple is 1.44x in both cases, but IRR is time-sensitive, so delay lowers it. Option B ignores the time value.

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