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CFA Level III Pathway: Private Markets Practice Questions

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CFA Institute Level III exam topics and pathways
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7
Updated
Nov 3, 2026

  1. Question 1, medium

    A sponsor buys a company at 8.0x EBITDA of $100M, financed with $400M of debt and $400M of equity. After five years, EBITDA is $130M, the exit multiple is 8.0x, and debt is $240M. How much of the equity gain came from debt paydown?

    • A.$240M
    • B.$160M
    • C.$400M
    • D.$80M
    Show answer and explanationHide answer

    Correct answer: B. $160M

    Entry EV is $800M and exit EV is $1,040M; exit equity is $800M, a gain of $400M. EBITDA growth contributes $30M x 8 = $240M, multiple change adds zero, and debt paydown adds $400M - $240M = $160M.

    • A. $240M is the contribution of EBITDA growth.
    • B. Right: deleveraging contributed $160M of the $400M gain.
    • C. $400M is the total equity gain.
    • D. $80M is half the correct figure with no supporting calculation.

  2. Question 2, medium

    A mezzanine loan pays 6% cash interest and 6% PIK interest. Which statement about the PIK component is correct?

    • A.It lowers the lender's total return because accrued interest does not compound
    • B.It raises the lender's seniority because added principal ranks ahead of existing debt
    • C.Accrued interest is added to principal, deferring cash payments but raising leverage and the lender's exposure
    • D.It removes default risk until maturity because no cash payment can be missed
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    Correct answer: C. Accrued interest is added to principal, deferring cash payments but raising leverage and the lender's exposure

    PIK interest accrues to principal, easing near-term cash burden on the borrower but increasing debt owed at maturity. That raises leverage and refinancing risk, so the lender's exposure to loss grows.

    • A. Accrued PIK interest compounds, which usually raises the lender's yield.
    • B. Added principal stays in the same ranking as the original loan.
    • C. Right: deferral helps cash flow but enlarges the debt and the lender's exposure.
    • D. The borrower can still default on maturity or other terms.

  3. Question 3, medium

    Two public-private partnerships are under review. A hospital concession receives a fixed annual payment from the government if the facility meets availability standards. A toll road's revenue depends on traffic. Which statement is accurate?

    • A.The hospital has usage-based payments exposed to patient volumes, while the toll road has availability-based payments from the state
    • B.Both concessions have availability-based payments because governments grant all concessions
    • C.The hospital has availability-based payments with little demand risk but penalty exposure, while the toll road is usage-based
    • D.Both concessions have usage-based payments because infrastructure revenue always depends on user demand
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    Correct answer: C. The hospital has availability-based payments with little demand risk but penalty exposure, while the toll road is usage-based

    Availability payments compensate the operator for keeping the asset available to standard, shifting demand risk to the government but exposing the operator to penalties for poor performance. Usage-based concessions earn revenue from users, so demand risk sits with the investor.

    • A. This swaps the payment structures of the two assets.
    • B. Government grants do not make every concession availability-based.
    • C. Right: availability payments avoid demand risk; usage-based tolls depend on traffic.
    • D. Many concessions do not depend on demand, as availability structures show.

  4. Question 4, easy

    A fund with $200M of commitments charges 2.0% on committed capital during a five-year investment period and, afterwards, 2.0% on invested capital net of realizations. In year six, net invested capital is $120M. What is the year-six management fee?

    • A.$4.00M
    • B.$2.40M
    • C.$1.20M
    • D.$2.00M
    Show answer and explanationHide answer

    Correct answer: B. $2.40M

    After the investment period the fee base steps down to net invested capital: 2.0% x $120M = $2.40M. The $4.00M figure would apply if the committed base were still used.

    • A. $4.00M applies 2.0% to committed capital, which is the investment-period basis.
    • B. Right: 2.0% x $120M = $2.40M.
    • C. $1.20M halves the rate, which the terms do not do.
    • D. $2.00M is 1.0% of commitments, not the stated basis.

  5. Question 5, medium

    A fund holds a $20M mezzanine position with an annual probability of default of 5% and an expected recovery of 30% of exposure. What is the expected annual loss?

    • A.$0.70M
    • B.$0.30M
    • C.$1.00M
    • D.$14.00M
    Show answer and explanationHide answer

    Correct answer: A. $0.70M

    Expected loss = exposure x PD x LGD = $20M x 5% x (1 - 30%) = $20M x 0.05 x 0.70 = $0.70M. Loss given default is one minus the recovery rate, so recovery reduces the loss that default would cause.

    • A. Right: $1.0M expected default loss before recovery, scaled by 70% loss given default, is $0.70M.
    • B. $0.30M multiplies by the recovery rate instead of LGD.
    • C. $1.00M ignores recovery.
    • D. $14.00M is exposure times LGD without the default probability.

  6. Question 6, easy

    Under a deal-by-deal (American) waterfall, a GP takes carry on early exits. Later investments lose money, leaving the GP's cumulative carry above 20% of total fund profit. Which provision lets LPs recover the excess?

    • A.A clawback requiring the GP to return excess carry at fund end
    • B.A catch-up provision that reallocates later distributions to the LPs
    • C.A hurdle provision that suspends carry until a minimum fee is paid
    • D.A key-person clause that suspends the investment period
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    Correct answer: A. A clawback requiring the GP to return excess carry at fund end

    A clawback obliges the GP to return carry received in excess of its entitlement over the fund's life. It protects LPs under deal-by-deal waterfalls, where carry can be paid before all losses are known.

    • A. Right: clawback returns over-distributed carry to LPs.
    • B. A catch-up gives the GP a larger share after the hurdle; it does not return carry.
    • C. A hurdle sets a minimum LP return before carry; it does not recover carry already paid.
    • D. A key-person clause addresses departure of named professionals, not carry.

  7. Question 7, medium

    A venture fund shows a negative IRR in years one to three and a positive IRR by year five. A trustee asks why the early figures are negative. Which explanation is best?

    • A.Early-stage companies always lose value in their first years, so write-downs are guaranteed
    • B.The GP is paid carry before LPs recover capital, which reduces early returns
    • C.Fees are charged while portfolio companies are still carried near cost and have not matured
    • D.The IRR formula ignores unrealized value, so early IRR is mechanically understated
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    Correct answer: C. Fees are charged while portfolio companies are still carried near cost and have not matured

    The J-curve arises because management fees and expenses are paid from the first years while investments are held near cost and have not yet appreciated. Value creation and realizations come later, so the cumulative return turns up.

    • A. Write-downs happen at times, but they are not guaranteed or the main driver.
    • B. Carry is paid only after returns exceed the hurdle, not in the early years.
    • C. Right: early fees against unmatured, cost-based valuations produce the dip.
    • D. Interim IRR includes residual NAV as a terminal value.

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