Skip to content

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

An investor reviews a private equity fund's reported net asset value, which relies on Level 3 inputs. Which due diligence step best addresses the risk that the GP's quarterly valuations are biased upward during fundraising?

The best step is to check that an independent valuation committee or third-party agent applies a documented, consistent policy, and to compare past marks with later exit prices. This tests whether Level 3 valuations were inflated, which fee terms, currency reporting or return targets cannot reveal.

  1. AConfirming that valuations are reported in the fund's base currency
  2. BReviewing whether an independent valuation committee or third-party valuation agent applies a documented policy consistently, and comparing marks with subsequent exit pricesCorrect
  3. CVerifying that the management fee is charged on invested rather than committed capital
  4. DChecking that the fund's target return exceeds the public equity benchmark

Explanation

Upward bias in unobservable-input marks is mitigated by independent oversight, a consistent documented policy, and back-testing marks against realised exit prices. The other options concern currency, fees or return targets and do not test valuation integrity.

Did you get it right without looking?

One question tells you little. A timed set on Private Markets Investing shows your real accuracy, how long you take and where you lose marks.

Practise Private Markets InvestingFree diagnostic mock

More Private Markets Investing questions