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CFA Level I · CFA Level I Exam · Alternative Investment Performance and Returns

An analyst notes that a private equity fund's IRR is high, but most of its value came from an early large distribution after a quick exit. Compared with a multiple-based measure such as TVPI, the IRR is most likely to:

IRR most likely reflects cash flow timing, which can inflate it relative to the multiple. Early distributions shorten the holding period and lift the annualized rate, while TVPI ignores timing and only compares total value to paid-in capital.

  1. AUnderstate performance because early cash flows are discounted heavily
  2. BReflect the timing of cash flows, which can inflate the result relative to the multipleCorrect
  3. CIgnore the timing of cash flows and depend only on total proceeds

Explanation

IRR is sensitive to timing, so quick early distributions raise it even if the total multiple on invested capital is modest. Multiples ignore timing; IRR does not.

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