Private Markets Cert cheat sheet

Private markets = capital raised outside public exchanges: private equity (buyout, growth, venture), private credit, real assets (infrastructure, real estate, natural resources), and secondaries/funds-of-funds.

Fund structure: limited partnership with a GP (manager, unlimited liability, carries) and LPs (passive, liability capped at commitment); typical life 10 years + 2 extension years; investment period 4-5 years.

Capital call (drawdown) mechanics: LPs fund committed capital on notice (commonly 10 business days); unfunded commitment is a contingent liability and drives denominator-effect distortions in IRR.

Fee stack: management fee typically 1.5-2.0% of commitments during investment period, then on invested cost or NAV; performance fee (carried interest) commonly 20% over an 8% preferred return with a GP catch-up and clawback.

Waterfall: European (whole-fund) returns capital and pref to all LPs before any carry; American (deal-by-deal) pays carry per realization and needs clawback/interim true-up to protect LPs.

Valuation hierarchy: IPEV guidelines require fair value; Level 1 observable market prices, Level 2 observable inputs, Level 3 unobservable model inputs (DCF, multiples, calibration to recent transactions).

Key return metrics: IRR is time-weighted on dollars and inflated by early distributions (reinvestment assumption); TVPI = (NAV + distributions) / paid-in capital; DPI = distributions / paid-in; RVPI = NAV / paid-in; PME compares against a public index.

J-curve: early negative returns from fees and write-downs before value creation; deepens with higher fees, longer hold periods, and slower deployment.

Liquidity and diversification limits: private assets are illiquid, drawn over years, and reported with appraisal-based (smoothed) valuations, which understate volatility and correlations to public markets.

Buyout economics: leverage amplifies equity returns; value creation levers are EBITDA growth, multiple expansion, deleveraging, and fee/terms; entry multiple discipline dominates outcomes.

Venture stage risk: pre-seed/seed (idea, team), Series A (product-market fit), growth (scaling); power-law return distributions mean a small number of names drive fund returns, so ownership and reserve strategy matter.

Private credit: floating-rate senior loans priced off SOFR plus spread; key risks are covenant-lite structures, PIK toggle features, and mark-to-model valuations in stress; direct lending vs. syndicated (CLO) exposure differ.

Real assets: infrastructure (regulated/concession revenue, inflation linkage), real estate (cap rate = NOI / value; leverage and refinancing risk), natural resources (commodity price exposure).

Secondaries: LP-led (discount to NAV, faster deployment, J-curve mitigation) vs. GP-led continuation vehicles (conflict of interest, requires LPAC review and fairness opinion).

Diligence checklist: track record net of fees and on a PME basis, team stability and key-person clauses, fund size vs. strategy capacity, alignment (GP commitment), and successor-fund risk.

Portfolio construction: commitment pacing model matches drawdowns and distributions to target allocation; over-commitment is required because only a fraction of commitments is invested at any time.

Co-investment: lower fees (often no carry or reduced carry) and concentration control, but requires in-house underwriting capacity and raises single-asset concentration risk.

Red flags: style drift, valuation marks diverging from comparable public moves, GP-led restructuring of underperforming assets, and reliance on subscription credit lines to boost reported IRR.

Investor eligibility: US private funds rely on Securities Act private placement exemptions (Reg D 506(b)/506(c)) and Investment Company Act Section 3(c)(1) (≤100 beneficial owners) or 3(c)(7) (qualified purchasers); ERISA plans add fiduciary and 25% benefit-plan-investor tests.

Adviser registration: US private fund advisers file Form ADV and, above $150M private fund AUM, Form PF; exempt reporting advisers file a shortened ADV.

LP transparency: ILPA principles cover fee and expense reporting, disclosure of GP-led transactions, and LPAC (limited partner advisory committee) governance; side letters grant MFN, fee, and reporting terms.

Subscription credit lines: short-term facilities repaid by capital calls; they delay LP drawdowns and can inflate IRR; regulators scrutinize leverage and disclosure.

Operational controls: capital call and distribution notices, anti-money-laundering/KYC on beneficial owners, valuation policy and independent valuation agent, and custody/safekeeping of assets.

Reporting standards: fair value under ASC 820 / IFRS 13; GIPS requires time-weighted returns for composites but private funds commonly report since-inception IRR with clear disclosure.

Tax: carried interest taxed as capital gains in many jurisdictions subject to holding-period rules; US structures use blocker corporations for tax-exempt and non-US LPs; withholding and treaty positions matter.

Fund terms negotiation: key-person clause, no-fault divorce, LPAC consent rights, recycling provisions, and fee offsets (100% offset of transaction fees against management fee is LP-favorable).

Data and ESG: EDCI/ESG data templates and SFDR (EU) classification (Article 6/8/9) affect marketing and disclosure obligations for funds raised in Europe.