CFA Level I · CFA Level I Exam · Investments in Private Capital: Equity and Debt
A venture capital fund invests $4 million in a start-up for a stake that is expected to be worth $30 million at exit in five years. Ignoring dilution, the fund's annualized return is closest to:
The fund's annualized return is about 49%. The investment multiple is 30/4 = 7.5, and the annualized rate is 7.5 raised to the power 1/5, minus one, which gives roughly 49.6%. Simple averaging of the gain would overstate the return.
- A49%Correct
- B65%
- C87%
Explanation
Multiple = 30/4 = 7.5. Annualized return = 7.5^(1/5) - 1. ln 7.5 = 2.0149; divided by 5 = 0.40298; e^0.40298 = 1.496, so about 49.6%, closest to 49%. Using 7.5/5 style averaging (about 130%) or other shortcuts is wrong.
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