Chartered Alternative Investment Analyst (CAIA) Private Equity and Private Debt Syllabus

Private Equity and Private Debt syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Private Equity and Private Debt in Chartered Alternative Investment Analyst (CAIA), not a summary of it.

1. 1

   Private Equity Fund Structures and Lifecycle

   3 topics

   • Limited partnership structure
     • General partner and limited partner roles
     • Capital commitments and drawdowns
     • Carried interest and the distribution waterfall
   • The J-curve and fund lifecycle
     • Investment, harvesting, and wind-down phases
     • Vintage year effects
   • Performance measurement
     • IRR, TVPI, DPI, and RVPI multiples
     • Public market equivalent (PME)
     • Benchmarking private equity
2. 2

   Venture Capital and Growth Equity

   3 topics

   • Venture capital fundamentals
     • Seed, early, and late-stage financing
     • Term sheets and liquidation preferences
   • Valuation of early-stage companies
     • Venture capital method
     • Pre-money and post-money valuation
   • Return distribution and power law
     • Home runs and write-offs
     • Portfolio construction in VC
3. 3

   Leveraged Buyouts and Value Creation

   3 topics

   • LBO mechanics
     • Capital structure and debt financing
     • Sources and uses of funds
   • Value creation levers
     • Operational improvement and multiple expansion
     • Deleveraging and financial engineering
   • Exit strategies
     • IPO, strategic sale, and secondary buyout
     • Dividend recapitalizations
4. 4

   Private Credit and Distressed Debt

   3 topics

   • Private debt strategies
     • Direct lending and mezzanine finance
     • Unitranche and senior secured loans
   • Distressed and special situations debt
     • Distressed-for-control investing
     • Loan-to-own strategies
   • Credit risk and structuring
     • Covenants and seniority
     • Recovery rates and default risk
5. 5

   Secondaries and Co-Investments

   3 topics

   • The secondary market
     • LP-led versus GP-led secondaries
     • Continuation vehicles
   • Pricing secondary interests
     • NAV-based discounts and premiums
     • Mitigating the J-curve
   • Co-investment programs
     • Fee economics and alignment
     • Selection and execution risks

Private Equity and Private Debt flashcards for Chartered Alternative Investment Analyst (CAIA)

22 of 54 cards from the Private Equity and Private Debt deck — real questions with worked answers.

1. In a private equity limited partnership, who are the GP and the LPs, and what is each party's liability?

   The General Partner (GP) is the fund manager who runs the fund and has unlimited liability; the Limited Partners (LPs) are the passive investors whose liability is limited to their committed capital.

2. What is the difference between committed capital, called (drawn-down) capital, and paid-in capital in a PE fund?

   Committed capital is the total an LP pledges; called/drawn-down capital is the portion the GP has actually requested via capital calls; paid-in capital is the cumulative amount the LP has actually contributed (often used interchangeably with called).

3. What is the typical fee structure ('2 and 20') in a private equity limited partnership?

   A management fee of roughly 2% of committed capital per year plus carried interest of about 20% of the fund's profits paid to the GP.

4. What is a GP 'clawback' provision in an LPA?

   A provision requiring the GP to return previously received carried interest if, at the end of the fund's life, the GP was overpaid relative to the agreed profit split (e.g., early winners offset by later losers).

5. What is a hurdle rate (preferred return) and a GP catch-up in PE waterfalls?

   The hurdle/preferred return is the minimum IRR (often ~8%) LPs must receive before the GP earns carry; the catch-up then lets the GP collect a larger share of subsequent profits until it has received its full 20% of total profits above the return of capital.

6. Distinguish a 'deal-by-deal' (American) waterfall from a 'whole-fund' (European) waterfall.

   In a deal-by-deal/American waterfall the GP earns carry on each profitable deal individually; in a whole-fund/European waterfall LPs must first receive all contributed capital plus the preferred return across the entire fund before the GP receives any carry. The European structure is more LP-friendly.

7. What is the typical legal life of a closed-end private equity fund, and how is it split?

   Roughly 10 years (often extendable by 1-2 years), split into an investment period of about 5 years for making new investments and a subsequent harvesting period for managing and exiting portfolio companies.

8. What is a 'key person' clause in a limited partnership agreement?

   A provision that suspends the fund's investment period (no new capital calls/investments) if one or more named key executives leave or stop devoting sufficient time to the fund.

9. What causes the J-curve in private equity, and what does the curve depict?

   The J-curve plots an LP's net cash flow or net IRR over time; early returns are negative because of management fees and capital outflows before investments mature, then turn positive as portfolio companies are exited at gains, forming a 'J' shape.

10. Name two techniques a GP can use to mitigate (flatten) the J-curve.

    Use of subscription-line (credit) facilities to delay capital calls, and acquiring secondary fund interests or making investments in more mature assets so distributions arrive sooner.

11. Why is IRR, rather than a time-weighted return, the preferred performance measure for private equity funds?

    Because the GP controls the timing and size of cash flows (calls and distributions), so a money-weighted/dollar-weighted measure like IRR captures the impact of those timing decisions, which a time-weighted return ignores.

12. Define the TVPI multiple and how it decomposes.

    Total Value to Paid-In = (cumulative distributions + residual NAV) / paid-in capital. It decomposes into DPI (Distributions to Paid-In, realized) plus RVPI (Residual Value to Paid-In, unrealized).

13. What does DPI measure and why is it called the 'realization' or 'cash-on-cash' multiple?

    DPI = cumulative distributions / paid-in capital. It measures how much cash has actually been returned to LPs relative to capital paid in, ignoring unrealized NAV, so it reflects realized performance only.

14. What is the difference between gross IRR and net IRR in a PE fund?

    Gross IRR is the return on the fund's investments before fees and carry; net IRR is the return actually received by LPs after deducting management fees, carried interest, and fund expenses.

15. What is the PME (Public Market Equivalent) and what question does it answer?

    PME benchmarks a PE fund against a public index by simulating investing the fund's cash flows in that index; it answers whether the LP would have done better or worse putting the same cash flows into public markets (PME > 1 means PE outperformed).

16. Why can IRR overstate performance, and what is a 'vintage year'?

    IRR can be inflated by early distributions (reinvestment assumption) and by subscription-line use; a vintage year is the year a fund makes its first drawdown/investment and is the standard basis for comparing funds raised under similar market conditions.

17. What stages of company financing does venture capital typically fund?

    Seed/angel, early stage (Series A/B), and later/expansion stage (growth) financing rounds, generally before a company is profitable or has positive cash flow.

18. What is the difference between pre-money and post-money valuation?

    Pre-money valuation is the company's value before a new financing round; post-money valuation = pre-money + new investment. The investor's ownership % = new investment / post-money valuation.

19. Why do VCs typically use convertible preferred stock rather than common equity?

    Convertible preferred provides downside protection through a liquidation preference (paid before common), plus participation/anti-dilution rights and the upside option to convert to common equity if the company succeeds.

20. What is a liquidation preference and what does a '1x non-participating' preference mean?

    A liquidation preference sets the order/amount preferred holders receive on exit. '1x non-participating' means the investor gets back 1x their investment OR converts to common (whichever is greater), but not both.

21. What is anti-dilution protection, and how do full-ratchet and weighted-average provisions differ?

    Anti-dilution protects investors when later shares are issued at a lower price (down round). Full-ratchet resets the earlier conversion price to the new lower price; weighted-average adjusts it based on the size and price of the new issuance, making it less punitive to founders.

22. How does the venture capital method value an early-stage company?

    Estimate the company's terminal/exit value (e.g., exit-year earnings x exit multiple), discount it back at a high target rate of return (or divide by the target multiple), then divide by the investment to determine the required ownership stake.

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