CFA Level III Pathway: Private Markets Practice Questions
Question 1
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 explanation
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.
Question 2
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
Show answer and explanation
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.
Question 3
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
Show answer and explanation
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.
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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 explanation
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.