Skip to content

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

A fund of funds analyst notes that a young venture fund (year 3 of a 10-year life) reports an IRR of 35% and TVPI of 1.2x, with DPI of 0.0x. Which conclusion is most appropriate?

Interim IRR for a young fund relies on unrealized, manager-estimated valuations and is distorted by early-life effects such as the J-curve, so it is a poor predictor of final returns. DPI of zero means nothing is realized yet, and TVPI is largely unrealized.

  1. AThe IRR is likely unreliable as a predictor of final performance because it rests on early valuations and the J-curve effect distorts interim measuresCorrect
  2. BThe fund has already proven top-quartile since IRR exceeds 25%
  3. CThe fund has no value because DPI is zero
  4. DThe TVPI of 1.2x is realized return because it exceeds one

Explanation

Early in a fund's life, returns depend on unrealized, manager-set NAVs and are sensitive to small early value changes, so interim IRR is a poor guide. Option B treats interim IRR as final. Option C ignores that NAV is part of value. Option D confuses TVPI with realized value, which is DPI.

Did you get it right without looking?

One question tells you little. A timed set on Private Markets Investing shows your real accuracy, how long you take and where you lose marks.

Practise Private Markets InvestingFree diagnostic mock

More Private Markets Investing questions