CFA Level I · CFA Level I Exam · Equity Instrument Features
A venture capital fund buys shares in an unlisted start-up and expects to realize its return mainly through a trade sale or an initial public offering. This expected return mechanism is best described as:
The mechanism is an exit strategy. Because private equity shares have no liquid trading market, investors plan to realize value by selling the company to a buyer or listing it through an initial public offering, rather than relying on dividends or buybacks.
- Aa dividend reinvestment plan
- Ban exit strategyCorrect
- Ca share repurchase program
Explanation
Private equity investors typically lack a liquid market, so they plan exits such as an IPO, a sale to a strategic buyer, or a secondary sale. Dividend reinvestment and buybacks are not the main realization route for venture investors.
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