Alternative and illiquid assets, including property and private markets
This domain tests whether you can value and govern illiquid assets without pretending they are liquid. Expect property, private equity, infrastructure, private credit and hedge funds, with emphasis on valuation, fees and liquidity risk.
Core concepts
Illiquid assets may offer a premium, but the premium is compensation for lock-up, valuation uncertainty, manager selection and governance burden. Property valuation uses capitalisation rates, comparable transactions and discounted cashflow; valuations are often smoothed. Private equity cashflows are J-curve shaped: early drawdowns and fees precede exits. IRR is money-weighted and sensitive to cashflow timing.
Worked example
A private equity fund calls 100 at time 0 and returns 60 at year 1 and 80 at year 2. The IRR solves 100 = 60/(1+r) + 80/(1+r)^2. At r = 24%, the right-hand side is about 100, so the IRR is approximately 24%. This is a money-weighted return; it is not the same as a time-weighted return and is flattered if early distributions are large.
Traps
- Comparing a smoothed property valuation with a volatile market price.
- Ignoring fees, carry and vintage effects.
- Treating IRR as a time-weighted skill measure.
- Underestimating liquidity and redemption risk in stress.