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

An analyst reviews a young buyout fund in its third year. Its reported IRR is very high, but its DPI is 0.05 and its TVPI is 1.10. Which interpretation is most appropriate?

The IRR should be treated cautiously because it is computed over a short horizon and relies on unrealized interim valuations. With DPI at only 0.05, almost none of the value has been realized in cash, so the high IRR may not be sustained by the fund's final outcome.

  1. AThe IRR is reliable because it is money-weighted and already reflects the fund's final outcome
  2. BThe IRR is likely distorted by early valuation markups and the short time horizon, so the result is largely unrealized and should be treated cautiouslyCorrect
  3. CThe low DPI shows that the fund has already lost most of the invested capital
  4. DThe TVPI of 1.10 shows that the fund has outperformed public equities

Explanation

Early in a fund's life, IRR is sensitive to short durations and interim valuations (the J-curve effect and markups), and a low DPI means little has been realized. TVPI alone says nothing about public market comparison, and a low DPI in year three is normal rather than a sign of loss.

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