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

An investor with a diversified portfolio of private equity fund commitments wants to model future capital calls and distributions using the Takahashi-Alexander (Yale) model. Which of the following describes a feature of this model?

In the Takahashi-Alexander model, capital calls are a percentage of the remaining unfunded commitment, and distributions are a percentage of the fund's NAV, with the distribution rate rising as the fund ages. NAV evolves with growth, calls and distributions, making the cash flows deterministic given the assumptions.

  1. ACapital calls are a fraction of remaining unfunded commitment, while distributions are a function of NAV via a rate of distribution that increases with fund ageCorrect
  2. BCapital calls are a fixed share of total commitment each year, and distributions are a fixed share of cumulative calls
  3. CDistributions are determined only by public market returns, and capital calls are random draws from a normal distribution
  4. DNAV is assumed constant over the fund life, so that distributions equal the contributions made in prior years

Explanation

In the Takahashi-Alexander model, contributions in each year equal a rate of contribution multiplied by the remaining unfunded commitment. Distributions equal a rate of distribution multiplied by the NAV, where the rate rises with fund age. NAV grows at an assumed rate of return net of distributions and plus contributions, so the other options misstate the mechanics.

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