Mock Assessment – Marking Guide
Total marks: 100
Award marks for the substance of the answer — correct concepts, appropriate caveats, and practical reasoning — not for matching these words exactly. The Common mistakes notes identify the specific errors most likely to occur.
Section 1 — Core Private Markets Mechanics (13 marks)
Q1 — Illiquidity premium [4 marks]
Model answer
- The illiquidity premium is the extra return an investor demands for committing capital to an asset they cannot sell or redeem during the fund’s term
- Condition 1: the investor does not need access to the capital during the lock-up period — they can genuinely afford to wait
- Condition 2: private markets must offer returns that could not be replicated in equivalent public investments — there must be an actual premium available to capture
- (Accept any third reasonable condition: e.g. the premium must exceed the value of forgone flexibility; or active management must add value that justifies the illiquidity)
Marking points
- 1 mark: correct definition referencing locked-up capital and extra return demanded
- 1 mark per valid condition, up to 3 marks; minimum 2 required for full marks
Common mistakes: Stating the premium is automatic or risk-free; confusing illiquidity premium with equity risk premium; not attaching conditions. [→ ../concepts/illiquidity-premium.md]
Q2 — J-curve and subscription line [5 marks]
Model answer — Part (a) [2 marks]
- Phase 1 — Negative (years 1–3): management fees are charged against a portfolio not yet marked up; investments held at cost or with early losses; deal costs expensed
- Phase 2 — Recovery (years 3–6): portfolio companies grow; valuations increase; unrealised gains accumulate
- Phase 3 — Positive/Harvest (years 6–10): exits occur; cash distributions rise; DPI accumulates; fund value crystallises
Marking points (a)
- 1 mark for identifying and explaining the negative early phase
- 1 mark for identifying and explaining the recovery and harvest phases (award if both are present)
Model answer — Part (b) [3 marks]
- A subscription line delays when the LP actually transfers cash; the fund draws on the credit line to invest and calls LP capital later to repay
- The LP’s measured holding period is shortened; because IRR rewards faster capital deployment, the reported IRR is higher — without any change to underlying investment returns
- The J-curve trough appears shallower and shifted later from the LP’s perspective — the early negative phase is compressed because LP cash did not go out on day one
Marking points (b)
- 1 mark: correct mechanism (line delays LP cash out)
- 1 mark: correct IRR effect and why (shorter measured period → higher IRR)
- 1 mark: correct J-curve shape effect
Common mistakes: Saying the subscription line improves actual performance; not distinguishing IRR effect from MOIC (MOIC is unaffected); describing the J-curve effect in absolute terms only without relating it to the LP’s perspective. [→ ../concepts/j-curve.md]
Q3 — Overcommitment risk scenario [4 marks]
Model answer
- Risk illustrated: overcommitment risk / LP-side liquidity risk
- Three simultaneous capital calls of £8m against only £5m liquid: LP cannot meet its obligations without selling other assets, borrowing, or defaulting on at least one call
- Planning error: the LP modelled commitments and liquidity independently; unfunded commitments of £18m (£40m − £22m) represent a standing contingent obligation, not an absorbed cost; maintaining only £5m in liquid reserves against that exposure was insufficient
- Correct approach: LP should have modelled stressed scenarios (simultaneous calls) and maintained a higher liquidity buffer or arranged a credit facility to bridge unexpected calls
Marking points
- 1 mark: correctly names the risk (overcommitment risk or equivalent)
- 1 mark: identifies the cash shortfall and its immediate consequence
- 1 mark: explains the planning error (failure to model unfunded commitments as contingent liabilities)
- 1 mark: states what correct planning would look like
Common mistakes: Describing only the immediate shortfall without diagnosing the planning failure; not calculating or estimating the unfunded commitment. [→ ../risk/liquidity-risk.md]
Section 2 — Fund Structures and LP/GP Economics (16 marks)
Q4 — European waterfall [8 marks]
Model answer
Fund: £80m capital, 6 years, gross exit value £180m, 8% compound preferred return, full catch-up, 20% carry.
(a) Return of capital [1 mark] LPs receive £80m
(b) Preferred return [2 marks] £80m × (1.08⁶ − 1) = £80m × 0.5869 ≈ £46.95m (round to £47m acceptable) Award 1 mark for correct formula; 1 mark for correct calculation within ±£1m
(c) GP catch-up [2 marks] Remaining after return of capital and preferred return: £180m − £80m − £47m = £53m
Target: GP must ultimately hold 20% of total profits. Total profit = £100m; GP target = £20m. LPs received £47m in preferred return; GP has received £0. Let catch-up = C. Condition: C ÷ (47 + C) = 20% C = 0.2 × (47 + C) → 0.8C = 9.4 → C ≈ £11.75m
Award 1 mark for correct method; 1 mark for correct result within ±£0.5m
(d) Final split [2 marks] Remaining after catch-up: £53m − £11.75m = £41.25m LP share (80%): £33m GP share (20%): £8.25m
Award 1 mark for identifying 80/20 split applies to the residual; 1 mark for correct amounts
(e) Totals [1 mark] LP total: £80m + £47m + £33m = £160m GP total: £11.75m + £8.25m = £20m Check: £160m + £20m = £180m ✓; GP = 20% of £100m profit ✓
Common mistakes: Using simple (not compound) preferred return; treating the catch-up as all remaining profit after the preferred return (incorrect — it stops when GP reaches 20% of total profit distributed to that point); not verifying that totals sum to exit value. [→ ../concepts/waterfalls.md | ../concepts/carried-interest.md]
Q5 — Recycling and DPI [5 marks]
Model answer
- Recycling provisions allow a fund to reinvest exit proceeds within the fund rather than distributing them to LPs
- Effect on DPI: DPI remains at zero or very low throughout the recycling period, even if the fund has successfully exited investments, because cash is being redeployed rather than distributed
- Large LP concern: institutional LPs with defined distribution obligations (e.g. pension funds paying beneficiaries, endowments with spending requirements) cannot use recycled capital to meet those obligations; the capital is productive within the fund but inaccessible
- Additional point: the LP committed more capital than a single investment cycle required but receives no cash return until all recycling is complete and exits are ultimately distributed
Marking points
- 1 mark: correct definition of recycling
- 2 marks: clear explanation of DPI effect (stays low; why it stays low)
- 2 marks: specific explanation of why large LPs with distribution obligations find this problematic
Common mistakes: Confusing recycling with reinvestment within a portfolio company; not connecting recycling to the LP’s cash flow obligations. [→ ../concepts/recycling-provisions.md | ../metrics/dpi.md]
Q6 — Co-investment vs fund-of-funds [3 marks]
Model answer
- Co-investment: LP invests directly in a deal alongside the GP fund, typically at zero or significantly reduced management fees and zero carried interest on the co-invested amount
- Fund-of-funds: LP pays two layers of fees — management fees and carry to the FoF manager, plus the underlying fund’s own fees and carry; double fee drag reduces net return
- Net return advantage: a co-investment in the same deal avoids the fee drag that a fund-of-funds commitment in the same deal would incur; the trade-off is higher concentration risk in a single company
Marking points
- 1 mark: co-investment fee advantage correctly described
- 1 mark: FoF double fee layer correctly identified
- 1 mark: acknowledgement of the concentration risk trade-off (or any other valid difference in risk profile)
Common mistakes: Saying co-investments are always preferable without noting concentration risk; not identifying the double fee layer in FoF structures. [→ ../fund-structures/co-investments.md | ../fund-structures/fund-of-funds.md]
Section 3 — NAV, Valuation, and Reporting (14 marks)
Q7 — Level 1/2/3 classification [4 marks]
Model answer
- (a) Listed company holding: Level 1 — unadjusted quoted price in an active market for an identical asset; no adjustment required
- (b) PE stake in an unquoted company: Level 3 — no observable market price; valuation relies on management’s models, multiples, and assumptions; inputs are unobservable
- (c) Leveraged loan with observable credit spreads: Level 2 — inputs are observable (credit spreads, comparable instruments) but no direct quoted price exists for this specific loan
Marking points
- 1 mark per correct classification with at least a one-phrase justification; deduct if justification contradicts the classification
- Final accuracy mark: award 1 bonus mark if all three are correct (alternatively, 1 mark per correct pair of classification + justification)
Common mistakes: Classifying the leveraged loan as Level 1 (there is no direct quoted price) or Level 3 (spreads are observable); saying Level 3 means poor quality valuation (it means unobservable inputs). [→ ../risk/valuation-risk.md | ../sources/ifrs-13-fair-value.md]
Q8 — Who calculates NAV [4 marks]
Model answer
- Typically calculated by the fund administrator — a third-party service provider structurally separate from the GP
- Independent check: the administrator’s separation from the GP provides a procedural verification that calculations are performed using agreed methodologies and reported data
- Material limitation: for Level 3 assets, the administrator accepts valuations provided by the GP; it cannot independently verify whether the fair value of an unquoted company is correct — the check is procedural, not substantive for illiquid holdings
- Additional point (award if given): external audit provides a deeper independent check, but it is typically annual and backwards-looking
Marking points
- 1 mark: fund administrator correctly identified as the primary calculator
- 1 mark: one independent check correctly described
- 2 marks: material limitation correctly identified (must include the Level 3 / illiquid assets point to score both marks)
Common mistakes: Saying the external auditor calculates NAV (it reviews, not calculates); saying the administrator provides full independent verification of valuations (it does not for Level 3 assets). [→ ../operations/nav-production.md]
Q9 — Year-8 fund performance assessment [6 marks]
Model answer
- TVPI 1.4×: total value (realised + unrealised) is 1.4× paid-in capital — moderate absolute return, below what most PE funds target at maturity
- DPI 0.3×: only 30p per £1 has been returned in cash after 8 years; very low for a fund approaching the end of its term
- RVPI 1.1×: the residual portfolio is still valued at 1.1× paid-in capital; at year 8 of 10, this is high — a maturing fund should be in harvest mode with RVPI declining
- Concern 1: DPI 0.3× at year 8 suggests exits have not materialised; either the exit market is closed, assets are struggling, or the GP is holding voluntarily in hopes of higher prices
- Concern 2: RVPI 1.1× at this stage means the vast majority of value remains on paper and subject to valuation risk; if those assets cannot be sold in years 9–10, the fund may need an extension
- Concern 3: valuations of assets held for 8 years may be stale or optimistic; Level 3 valuations can diverge significantly from realisable values at exit
Marking points
- 1 mark each for correctly interpreting TVPI, DPI, and RVPI in context (3 marks)
- 1 mark per distinct, well-reasoned concern up to 3 marks
Common mistakes: Assessing TVPI 1.4× positively without contextualising for fund maturity and the low DPI; not recognising that declining RVPI is the expected pattern for a mature fund; treating RVPI 1.1× as reassuring rather than concerning at year 8. [→ ../metrics/tvpi.md | ../metrics/rvpi.md | ../metrics/dpi.md]
Section 4 — Performance Metrics (17 marks)
Q10 — MOIC and IRR calculation [6 marks]
Model answer
(a) MOIC [2 marks] MOIC = £5.4m ÷ £2m = 2.7× Award 2 marks for correct answer; 1 mark for correct formula with arithmetic error
(b) IRR [4 marks] The investment is a single cash flow: £2m out at year 0, £5.4m in at year 5.
Method: MOIC = (1 + r)ⁿ → 2.7 = (1 + r)⁵
r = 2.7^(1/5) − 1
ln(2.7) ≈ 0.9933; divide by 5 = 0.1987; e^0.1987 ≈ 1.220
r ≈ 22%
Award 2 marks for correct formula/method; 2 marks for correct result (accept 21–23%)
Common mistakes: Calculating IRR as (total return ÷ years) — a linear approximation that is incorrect; computing (£5.4m − £2m) ÷ £2m ÷ 5 years = 34% (this is average annual return on profit, not IRR). [→ ../metrics/moic.md | ../metrics/irr.md]
Q11 — Subscription line IRR effect [5 marks]
Model answer
- A subscription line allows the fund to invest immediately using borrowed capital; LP capital is called later (e.g. 9 months after investment) to repay the line
- From the LP’s perspective, cash goes out 9 months later than the investment was made; the measured holding period is shorter
- IRR is time-sensitive: a shorter measured period for the same total return produces a higher IRR; the LP appears to have earned the same return in less time
- MOIC is unaffected: MOIC = total value ÷ total capital invested; it does not care about the timing of cash flows — only total amounts
- The difference between with-line and without-line IRR is purely a presentation effect; the underlying investment performance is identical
Marking points
- 1 mark: correct mechanism (line delays LP cash, not the investment)
- 2 marks: IRR effect correctly explained with reason (timing shortens measured period → higher IRR)
- 2 marks: MOIC correctly explained as unaffected, with reason
Common mistakes: Saying the subscription line boosts underlying performance; stating that MOIC also increases; not explaining why shorter periods inflate IRR. [→ ../metrics/irr.md | ../operations/capital-calls.md]
Q12 — IRR vs PME scenario [6 marks]
Model answer
(a) What PME tells you [3 marks]
- Fund A PME 0.88×: an investor who had put the same cash flows into a public index would have earned more than Fund A returned; despite a 14% IRR, Fund A underperformed its public market alternative
- Fund B PME 1.05×: Fund B generated returns 5% above what the same cash flows would have earned in the index; genuine outperformance on a risk-adjusted, opportunity-cost basis
- IRR alone cannot answer whether the return was better or worse than simply buying the market; PME provides that benchmark comparison
Award 1 mark per fund’s PME correctly interpreted; 1 mark for the general point about what PME adds
(b) Which performed better [3 marks]
- Fund B has performed better from an LP benchmarking perspective
- Fund B’s 11% IRR, combined with PME 1.05×, means it actually outperformed the public index even at a lower headline return — the LP was rewarded for accepting illiquidity
- Fund A’s 14% IRR sounds better but PME 0.88× means the LP would have earned more by simply investing in a public index with the same timing; the illiquidity and complexity of Fund A was not justified by its returns
Marking points
- 1.5 marks per fund’s PME correctly applied to the benchmarking question
- Deduct 1 mark if the candidate chooses Fund A based on IRR without applying the PME evidence
Common mistakes: Choosing Fund A because 14% > 11% without using PME; not connecting PME to the concept of opportunity cost or public market alternative. [→ ../metrics/public-market-equivalent.md | ../metrics/irr.md]
Section 5 — Liquidity, Leverage, and Concentration Risk (12 marks)
Q13 — LBO equity loss calculation [8 marks]
Model answer
(a) £60m equity, £90m debt; EV falls 40% [4 marks]
- New EV: £150m × 0.60 = £90m (1 mark)
- Debt remains at £90m (debt does not automatically decline with EV) (1 mark for explicitly noting this)
- Residual equity: £90m − £90m = £0 (1 mark)
- Equity loss: £60m − £0 = £60m; percentage loss = 100% (equity wiped out) (1 mark)
(b) £100m equity, £50m debt; EV falls 40% [2 marks]
- New EV: £150m × 0.60 = £90m
- Debt: £50m
- Residual equity: £90m − £50m = £40m (1 mark)
- Equity loss: £100m − £40m = £60m; percentage loss = 60% (1 mark)
(c) What this demonstrates [2 marks]
- The absolute equity loss is the same (£60m) in both cases, but the percentage loss is 100% vs 60%
- Higher leverage (60% LTV vs 33% LTV) amplified a 40% EV decline into total equity destruction; lower leverage preserved 40% of equity value in the same scenario
- Leverage amplifies losses non-linearly; debt must be repaid regardless of what happens to asset value (1 mark per clear, accurate point)
Common mistakes: Assuming debt declines proportionally with EV — the most common error; not calculating the percentage loss; not making an explicit comparison between (a) and (b) for part (c). [→ ../risk/leverage-risk.md]
Q14 — Four dimensions of concentration risk [4 marks]
Model answer (1 mark per dimension with a valid example; accept any four of the following)
- Asset concentration: excessive weighting to a single portfolio company — e.g. one holding represents 20% of total portfolio NAV
- Manager/GP concentration: multiple fund commitments with the same firm — e.g. three vintages all with the same PE manager
- Sector concentration: heavy industry weighting across holdings — e.g. 55% of portfolio in healthcare companies across multiple funds
- Vintage year concentration: most commitments made in the same 1–2 year window — e.g. five out of seven fund commitments made in 2007–2008
- Geographic concentration: over-exposure to one country or region — e.g. 70% of NAV in UK-only businesses
- Liquidity-type concentration: all positions are illiquid with no open-ended or liquid alternative offset
Common mistakes: Describing only asset-level concentration; giving examples that are really the same dimension restated differently. [→ ../risk/concentration-risk.md]
Section 6 — Hedge Funds and Private Credit (10 marks)
Q15 — PIK interest [5 marks]
Model answer
- PIK interest is interest that accrues as additional loan principal rather than being paid in cash; the borrower’s debt balance grows each period
- NAV effect: the lending fund recognises income and an increasing asset value (the growing loan balance) without receiving any cash; reported NAV and income rise on paper
- Income effect: the fund’s income statement shows interest income; distributions of cash income remain zero or very low
- Risk masked: borrower may be PIK-ing because it cannot generate sufficient cash to service interest — a sign of building credit stress; PIK can compound to levels the borrower cannot repay at maturity
- Additional risk: a fund relying on PIK income to meet its own operating costs or redemptions (in open-ended structures) will face a liquidity problem when cash is not flowing
Marking points
- 1 mark: correct definition
- 2 marks: correct NAV / income effect (both aspects needed for full marks)
- 2 marks: risk masked correctly identified (must include the credit stress angle)
Common mistakes: Treating PIK as equivalent to cash income; not identifying that the risk deferred is a cash repayment problem at maturity. [→ ../asset-classes/private-credit.md]
Q16 — Equalisation [5 marks]
Model answer
- Equalisation is the mechanism that ensures an LP joining a fund after the first close is economically equivalent to first-close LPs — as if they had invested from the beginning
- Without equalisation, late-close LPs would benefit from having their capital sit outside the fund while early LPs bore the costs and risks of the fund’s early period
- Cost 1 — Catch-up contribution: the late LP pays its pro-rata share of capital already called, plus interest on that amount for the period it was absent; this compensates early LPs who deployed capital sooner
- Cost 2 — Equalisation interest: the late LP pays interest to early LPs to compensate for the time value of those LPs’ earlier commitment; effectively reimburses the economic cost of being first
- Net effect: after equalisation, all LPs stand in the same position as if they had each committed at the first close
Marking points
- 1 mark: correct definition of purpose
- 2 marks: catch-up contribution correctly explained (what it is and why)
- 2 marks: equalisation interest correctly explained (what it is and why it compensates early LPs)
Common mistakes: Conflating equalisation interest with the preferred return (different purposes); describing only one of the two costs; not explaining why each cost exists. [→ ../concepts/equalisation.md]
Section 7 — Operations, Onboarding, and Subscriptions (9 marks)
Q17 — Closed-ended subscription stages [4 marks]
Model answer — Four stages in order
- Document distribution: investor receives and reviews the PPM, LPA, and subscription agreement
- KYC and AML: investor completes onboarding documentation; legal entity verified; UBOs identified; source of funds confirmed
- Subscription agreement execution: investor signs legal commitment for a specified capital amount; GP countersigns
- First capital call and fund transfer: capital call notice issued; LP transfers funds to the fund’s account within the notice period
Before capital transfer: KYC must be complete
Marking points
- 1 mark per stage correctly described (not required to use these exact labels — award for correct content)
- Deduct 1 mark if KYC is not identified as a prerequisite to capital movement
Common mistakes: Placing the capital transfer before KYC completion; omitting the document review stage; treating signing and transfer as a single step. [→ ../operations/subscriptions.md | ../operations/onboarding-and-kyc.md]
Q18 — Recallable distributions [5 marks]
Model answer — Part (a) [2 marks]
- Recallable distribution: the GP retains the right to demand return of the distributed amount within a specified window (typically for follow-on investments or fund expenses); does not permanently reduce the LP’s committed capital
- Non-recallable distribution: once paid, permanent; reduces the LP’s remaining commitment; the LP can treat it as a finalised return of capital or profit
1 mark per definition, correctly contrasted
Model answer — Part (b) [3 marks]
- LP received £10m in Q2; Q4 recall notice for £6m is legally valid under the LPA and must be honoured
- LP must return £6m within the specified notice period (typically 10 business days); failure to comply constitutes an LP default
- Implication: the LP should have treated the £10m as contingent from receipt until the recall window closed; if it spent or committed the £10m elsewhere, returning £6m creates a genuine liquidity strain; LP liquidity models must account for the possibility of recall throughout the recall window
Marking points (b)
- 1 mark: LP must return the £6m (and within notice period)
- 1 mark: failing to return = LP default (or equivalent)
- 1 mark: LP should have modelled the distribution as contingent / implication for liquidity planning
Common mistakes: Saying the LP can refuse the recall; not recognising the LP default consequence; treating the initial distribution as permanently received. [→ ../operations/distributions.md]
Section 8 — Source-Backed Review (9 marks)
Q19 — ILPA Templates vs Principles [5 marks]
Model answer
- ILPA Templates: standardised format documents for LP-facing operational communications — capital call notices, distribution notices, quarterly fund performance reports, fee and expense disclosure tables; focus is on consistent, comparable data presentation across GPs and fund vintages
- ILPA Principles: a governance framework covering alignment of interest between GP and LP, fee transparency, fund governance, LPAC rights, fiduciary obligations, key-man provisions; focus is on how a fund is run, not how data is formatted
- Example — Templates covers: a standardised fee and expense schedule format so LPs can compare costs across funds
- Example — Principles covers: requirements around LPAC independence and conflict-of-interest management
Marking points
- 2 marks: ILPA Templates correctly described (focus on format and reporting)
- 2 marks: ILPA Principles correctly described (focus on governance and behaviour)
- 1 mark: one clear example of what each covers that the other does not
Common mistakes: Saying Templates covers governance (it covers format); conflating the two as interchangeable; not providing specific examples. [→ ../sources/ilpa-templates.md | ../sources/ilpa-principles.md]
Q20 — IFRS 13 and Level 3 for PE [4 marks]
Model answer
(a) Accounting standard [1 mark] IFRS 13 (Fair Value Measurement), published by the IASB
(b) Why PE holdings are Level 3 [3 marks]
- PE portfolio companies are unquoted private businesses; there is no observable market price for the specific holding — by definition this is Level 3
- Valuations rely on management’s own assumptions: earnings multiples (EV/EBITDA) derived from comparable public companies, adjusted for differences; DCF models using internal cash flow forecasts — all inputs are unobservable in the sense that they require judgement
- Even where comparable company data is used as a reference, significant judgement adjustments are required for differences in size, liquidity, leverage, and growth; the final valuation is a management estimate, not a market price
Marking points
- 1 mark: IFRS 13 correctly identified with 1 mark
- 1 mark per distinct, accurate reason for Level 3 classification, up to 3 marks
Common mistakes: Naming ASC 820 instead of IFRS 13 (ASC 820 is the US GAAP equivalent — accept if the candidate explicitly notes it applies to US-domiciled funds, but IFRS 13 is the correct answer for IFRS reporters); saying Level 3 means low-quality valuations (it means unobservable inputs). [→ ../sources/ifrs-13-fair-value.md | ../risk/valuation-risk.md]
Score Sheet
| Question | Topic | Marks Available | Your Score |
|---|---|---|---|
| Q1 | Illiquidity premium | 4 | |
| Q2 | J-curve and subscription line | 5 | |
| Q3 | Overcommitment risk scenario | 4 | |
| Q4 | European waterfall | 8 | |
| Q5 | Recycling and DPI | 5 | |
| Q6 | Co-investment vs FoF | 3 | |
| Q7 | Level 1/2/3 classification | 4 | |
| Q8 | NAV calculation and checks | 4 | |
| Q9 | Year-8 fund performance | 6 | |
| Q10 | MOIC and IRR calculation | 6 | |
| Q11 | Subscription line IRR effect | 5 | |
| Q12 | IRR vs PME scenario | 6 | |
| Q13 | LBO equity loss | 8 | |
| Q14 | Concentration risk dimensions | 4 | |
| Q15 | PIK interest | 5 | |
| Q16 | Equalisation | 5 | |
| Q17 | Subscription stages | 4 | |
| Q18 | Recallable distributions | 5 | |
| Q19 | ILPA Templates vs Principles | 5 | |
| Q20 | IFRS 13 and Level 3 | 4 | |
| Total | 100 |
Grade Boundaries
| Score | Interpretation |
|---|---|
| 80–100 | Strong command across all topics — proceed to Stage 7 of the Learning Path |
| 60–79 | Good foundation — revisit weaker sections before Stage 7 |
| Below 60 | Re-read the Weekly Study Plan and complete all four weeks before re-testing |
For any question where you scored below 50% of available marks, update your Weak Spots Tracker.