Skip to content

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

In a Takahashi-Alexander style model of private equity fund cash flows, the distribution in year t is a fraction of the net asset value (NAV) given by a rate of distribution, which rises with fund age. What is the main implication of a higher assumed rate of distribution early in the fund's life?

A higher early distribution rate means more of the NAV is paid out each year, so NAV shrinks faster and capital returns to the LP sooner. This shortens the investment's effective duration and lowers the LP's peak net cash exposure, without changing the contribution schedule.

  1. AThe fund's NAV is projected to decline faster and the LP's capital is returned sooner, reducing the duration of the investmentCorrect
  2. BThe LP's unfunded commitment rises because calls are delayed
  3. CThe fund's NAV growth rate is lowered permanently to zero
  4. DContributions are assumed to occur only in the final year

Explanation

Distributions are computed as a rate times NAV, so a higher rate returns cash faster and shrinks NAV. This shortens the effective duration and reduces the peak net cash outlay. It does not change the contribution schedule or the growth assumption directly.

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