Private Markets Cert common mistakes
Private Markets Cert · Understand the traps and how to avoid them.
Treating capital committed as capital invested when computing IRR, DPI, or TVPI, so the denominator includes unfunded commitment that has never been drawn.
The word 'capital' appears in both commitment and contribution contexts, and candidates skim the stem for a single number rather than separating the commitment line from the paid-in line. The error is invisible because the resulting IRR still looks plausible.
What to do instead
Before any return calculation, write down three labelled figures from the stem: total commitment, paid-in capital to date, and distributed capital. Compute IRR and multiples only from paid-in and distributed cash flows, and use commitment only for unfunded-liability or overcommitment questions. If the stem gives only a commitment, stop and check whether a paid-in figure is stated elsewhere before calculating.
Applying the management fee to invested capital when the fund documents specify committed capital, or vice versa, and then compounding that error across the fund life.
Both fee bases are common in the market, and candidates default to whichever they saw in a prior question rather than reading the stated basis. During the investment period the two bases diverge sharply, so the error grows with each year.
What to do instead
Locate the fee basis sentence in the stem and copy the exact wording into your scratch work before computing. Remember the typical pattern: fees on committed capital during the investment period, often switching to invested or net invested capital afterward. Build the fee schedule year by year rather than using a single average, and sanity-check that fees fall after the investment period ends.
Reading a distribution waterfall as if all proceeds split pro rata from the first dollar, ignoring the return-of-capital, preferred return, and catch-up tiers.
The arithmetic is simple once the tiers are laid out, but candidates jump to the LP/GP split percentage printed in the stem and multiply total proceeds by it. The European-versus-American waterfall distinction and the catch-up mechanics are the parts most often skipped.
What to do instead
Draw the tiers as a vertical stack before computing: return of contributed capital, then preferred return accrued on that capital, then GP catch-up to the agreed split, then residual split. Allocate proceeds tier by tier and stop when the pool is exhausted. Check whether the waterfall is fund-wide (European) or deal-by-deal (American), because that changes which losses offset which gains.
Confusing gross IRR with net IRR, or gross MOIC with net MOIC, and reporting the gross figure when the question asks what LPs actually received.
Stems often supply gross returns and mention fees separately, and candidates answer with the more prominent number. Gross figures exclude management fees, carried interest, and fund expenses, so the gap to net can be several hundred basis points.
What to do instead
Highlight the words 'net', 'to LPs', or 'after fees' in every return question. If only gross is given and net is requested, deduct fees and carry explicitly rather than estimating. When both are quoted, state which one you are using in your answer and why, and remember net is always the lower of the two for a profitable fund.
Describing a fund's strategy using its stated label (growth equity, buyout, secondaries) without matching the label to the actual cash flow, leverage, and holding-period characteristics described in the stem.
Candidates memorise strategy definitions as vocabulary rather than as economic profiles, so a stem describing long holds, heavy debt, and control positions gets labelled growth equity because the company 'grows'.
What to do instead
Build a one-page strategy matrix keyed on four observable traits: use of leverage, control versus minority position, holding period, and source of return (multiple expansion, EBITDA growth, or deleveraging). Classify from the traits, not the label. If the stem's traits conflict with the label, trust the traits and note the inconsistency.
Treating NAV as a reliable mark for a semi-liquid or interval fund without adjusting for stale pricing, redemption gates, or the gap between reported NAV and realisable value.
NAV is presented as a clean number and candidates use it as if it were a market price. Private assets are appraisal-based, so reported NAV lags true value, especially after a market shock, and gates can suspend the redemption the candidate assumes is available.
What to do instead
Whenever NAV appears, ask two questions: when was it struck, and can an investor actually exit at it? Apply a staleness discount or note the lag explicitly in the answer. For semi-liquid vehicles, check the stem for gate percentages, redemption notice periods, and any cap on quarterly redemptions before concluding an investor can withdraw.
Ignoring the J-curve and assuming a young fund's negative interim IRR signals poor performance rather than the normal pattern of fees and early losses preceding later gains.
Candidates apply public-market intuition, where a negative return means value destruction. In a closed-end fund the early negative IRR is largely a timing artefact of fees drawn before gains are realised.
What to do instead
When evaluating a fund in its first three to five years, compare against the expected J-curve rather than against a zero hurdle. State the fund's vintage and remaining life before judging performance, and use TVPI alongside IRR because TVPI is less distorted by early cash flow timing. Flag any conclusion drawn from IRR alone on an immature fund as unreliable.
Mixing up the LP and GP roles in governance questions, such as assigning investment decisions to the LP advisory committee or valuation policy to the GP's limited partners.
Both parties appear in every governance stem and the acronyms are visually similar, so candidates lose track of who does what under time pressure. The LP advisory committee sounds more powerful than it is.
What to do instead
Fix the division in memory: the GP sources, decides, and manages investments; the LP advisory committee reviews conflicts of interest and certain policy matters but does not pick deals. The LP advisory committee is advisory, not a board with veto over investments. Re-read the question stem and substitute 'the manager' for GP and 'the investors' for LP to confirm the role before answering.
Answering a due diligence or manager selection question with generic praise of the manager's track record instead of naming the specific operational, legal, or reference checks that would resolve the stated risk.
Track record is the most salient information in any manager profile, so candidates anchor on it. The question usually asks what additional work is needed precisely because the track record is already known.
What to do instead
Read what the stem already establishes and answer only about the gap. Structure diligence answers across four buckets: investment process and team, operations and fund administration, legal and compliance, and reference checks on realised exits. Name concrete artefacts such as audited fund financials, a sample of portfolio company references, and side-letter terms, rather than adjectives.
Computing a portfolio company's exit value from a single entry multiple without adjusting for leverage, fees, and the equity cheque actually written, producing an inflated MOIC.
Entry multiple and exit multiple are the numbers given, so candidates multiply them and stop. That yields an enterprise-value ratio, not an equity return, and ignores how debt amplifies or destroys equity value.
What to do instead
Always build the bridge explicitly: entry enterprise value, plus EBITDA growth, plus multiple change, minus net debt at exit, equals exit equity value. Divide exit equity by entry equity, not by enterprise value. Check that the debt level and any transaction fees are stated, and if they are not, state your assumption in the answer rather than silently omitting them.