FRM Part I · FRM Exam Part I · Fund Management
A venture fund invests USD 5 million for 40% of a start-up's equity. The start-up is later sold for USD 60 million, and the fund's stake has not been diluted. Over exactly 4 years, what is the fund's approximate annual compound return (IRR) on this single investment?
The fund receives 40% of USD 60 million, or USD 24 million, on a USD 5 million investment, a 4.8x multiple. Compounded over four years, 4.8 to the power one quarter is about 1.48, so the annual return is roughly 47 to 48%.
- AApproximately 47%Correct
- BApproximately 61%
- CApproximately 80%
- DApproximately 140%
Explanation
Proceeds are 40% x 60 = USD 24 million. The multiple is 24/5 = 4.8. Annualized: 4.8^(1/4). sqrt(4.8) = 2.191; sqrt(2.191) = 1.480. So IRR is about 48%, closest to 47%. The 140% distractor is the simple annual average (480%-100%)/4... no, it ignores compounding; 61% uses 3 years.
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