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

A pension plan holds an LP interest in a private equity fund whose reported IRR is 16%, while the fund has returned little cash. The fund's lender-provided credit line has been used to fund investments for 18 months before calling capital from LPs. What is the main effect of this practice on reported performance?

Using a subscription credit line delays capital calls, so LP money is treated as invested for less time. That mechanically raises the reported IRR while the multiple stays the same or falls slightly after interest costs. It flatters IRR without improving underlying profitability.

  1. AIt raises the IRR because the investor's capital is outstanding for a shorter period, without changing the multipleCorrect
  2. BIt lowers the IRR and raises the TVPI
  3. CIt raises the multiple of invested capital and lowers the IRR
  4. DIt has no effect on either IRR or multiple

Explanation

Delaying capital calls shortens the period for which LP capital is deemed invested, so IRR computed on LP cash flows increases. Total profit is roughly unchanged (interest costs slightly reduce it), so the multiple does not rise and may fall slightly. Hence the IRR is flattered, not the multiple.

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