Equity investment in companies not traded on public markets, typically held through a limited-partnership fund.
The exam most often makes you place a deal on the PE spectrum: a startup with little or no revenue is venture capital (equity-financed, early life-cycle), while a mature, cash-generative target acquired with heavy debt is a leveraged buyout — the tells are the company’s life-cycle stage and the use of leverage. A second favorite is the exit-route question — trade sale to a strategic buyer, secondary sale to another PE fund, IPO (usually the highest price), or recapitalization — and which one a manager picks given market conditions. A third pattern asks how PE creates value versus public equity: active ownership and control, not passive diversification.
The classic trap is confusing the fund with the firm/GP: carried interest is the GP’s profit share (~20%), not the fund’s return, and is paid only after return of capital and the preferred-return hurdle clear. Students also wrongly assume all PE is buyout — venture capital and growth equity are PE too. Memory hook: “private = patient capital” — locked up, illiquid, and judged at the finish line, not on interim marks.
Early-stage private capital invested in startups in exchange for equity, expecting most positions to fail and a few to return the fund.
The exam’s favorite VC question hands you a fund’s individual deal outcomes and asks what drives the result — the answer hinges on recognizing that the few winners, not the average, carry the fund, so never apply normal-distribution or mean-reversion logic. Watch for the “tell”: valuations are pre-money vs post-money (post-money = pre-money + the new investment), and a wrong choice usually swaps the two or forgets that the investor’s ownership % equals their check ÷ post-money value (e.g., $3M into an $18M post-money = 16.7%). Also expect diversification math — more, smaller bets raise the odds of catching a home run.
The classic trap is blending VC with its siblings. Buyout targets mature, cash-generative firms and relies on leverage and debt paydown; VC backs cash-burning startups with little or no debt, so its risk is operational, not financial. Private equity is the umbrella term — VC and buyout are both forms of it, so don’t treat them as mutually exclusive. Memory hook: VC swings for fences, not singles — power-law, not bell curve.
Acquisition of a controlling stake in a mature company, typically funded with significant debt (a leveraged buyout).
The classic item gives you a deal narrative and asks which lever did the work: if entry and exit EV/EBITDA multiples match but debt fell and EBITDA grew, the answer is deleveraging plus operational improvement, not multiple expansion — that lever only counts when the exit multiple exceeds the entry multiple. A second favourite is the buyout-versus-venture sort, and the tell is the kind of risk. Buyout risk is financial (the leverage), so returns are relatively predictable; VC risk is operational and binary — the company works or it doesn’t — and VC uses little or no debt because startups burn cash. VC returns follow a power-law, home-run distribution rather than buyout’s steadier profile.
The trap is treating buyout and private equity as synonyms. Buyout is one strategy inside the PE wrapper (alongside venture capital and growth equity), so the limited-partnership fund mechanics, the J-curve, and the 2-and-20 (2% management fee plus 20% carried interest) belong to the parent, not to buyout specifically.
The share of fund profits paid to the general partner, typically 20% above a hurdle rate.
Exam questions love a distribution-waterfall calculation: given committed capital, profits and a hurdle, solve for the GP’s carry. First check whether the waterfall is deal-by-deal (American) — carry paid per profitable deal, more GP-friendly — or whole-fund (European), where LPs recover all capital plus the hurdle before any carry is paid, so early-deal gains never trigger it. Level I fund-level examples are typically the whole-fund version, so work the cascade in that order. Watch the hurdle type: a hard hurdle charges carry only on profits above the threshold, while a soft hurdle (or any full catch-up) lets carry apply to the entire gain — candidates routinely skip the catch-up and undercount the GP.
Don’t confuse the hurdle (a return threshold) with the high-water mark (a hedge-fund device blocking repeat carry on merely recovered losses); a fund can use either, both or neither. Carried interest is the GP’s upside; management fees are paid regardless. Memory hook: “return, rate, catch-up, split.”
Hybrid financing that sits between senior debt and equity in the capital structure, often debt with equity warrants.
The exam usually tests mezzanine through a capital-structure ranking question: order the claims, and mezzanine slots above equity but below senior secured debt, so in default it ranks behind senior lenders but ahead of the equity sponsor. The “tell” is language about a financing gap or an equity kicker (warrants/options) — that signals mezzanine, not plain debt. Item-writers also use it inside an LBO: when senior lenders cap leverage, mezzanine adds capacity, letting the sponsor commit less equity and lift the deal’s equity return (IRR).
The classic trap is conflating mezzanine with the related strategies. Buyout/private-equity returns come from owning equity — debt paydown, operational/EBITDA gains, and multiple expansion — whereas mezzanine’s return is mostly a high coupon plus modest warrant upside, a fixed claim rather than ownership. Don’t call it senior debt: it is subordinated (often unsecured), which is exactly why the coupon is higher. Memory hook: mezzanine = the floor between the ground (senior debt) and the upper level (equity).
A basic, interchangeable good — energy, metals, agriculture — traded mainly through standardized futures contracts.
The exam loves to make you decompose the futures return and sign the roll yield. Given “futures price < spot” or “the curve is downward-sloping,” that is backwardation → positive roll yield; an upward-sloping curve is contango → negative roll yield. A second favorite hinges on pricing theory: under the insurance/normal-backwardation view, longs earn a risk premium because hedgers (producers) accept a discounted futures price to offload risk, while the theory of storage explains contango through high storage costs and a low convenience yield (abundant inventory). Watch the question asking which component dominates long-run — for a fully collateralized position, collateral (the risk-free rate) plus roll often outweighs spot appreciation.
The classic trap is conflating spot price changes with total return; commodities, unlike real estate (income via NOI) or infrastructure (contractual, often inflation-linked cash flows), throw off no cash flow, so income never enters. Don’t assume commodities are a reliable inflation hedge — they hedge unexpected inflation specifically. Hook: “Backwardation Builds, Contango Costs.”
Investment in physical property for rental income and capital appreciation, accessed directly or through REITs.
Item-writers love the income approach: you’ll get NOI and a cap rate and must back out value, or be handed comps to derive the cap rate first. The classic tell is a question that starts from potential gross income and forces you to subtract a vacancy and collection loss (giving effective gross income) plus operating expenses to reach NOI — candidates who capitalize gross rent instead of NOI overstate value. Remember NOI sits before financing and income taxes, so mortgage interest and depreciation never enter it; direct capitalization also assumes a stabilized, perpetual NOI, unlike a full DCF.
The sharper trap is mixing up the alternatives. Commodities generate no income, earning returns from spot moves, roll yield, and collateral yield; infrastructure delivers contractual, often regulated cash flows with bond-like, defensive profiles. Real estate sits between — but its appraisal-based valuations smooth reported returns, biasing measured volatility and cross-asset correlation downward and overstating diversification. And don’t assume that benefit survives a crisis, when correlations across assets tend to spike.
Investment in long-lived physical assets — toll roads, airports, utilities, pipelines — that generate stable, often inflation-linked cash flows.
The exam’s favorite move is to sort assets along two axes at once: greenfield vs. brownfield (construction stage) and economic vs. social infrastructure (asset type). The “tell” is a vignette describing a not-yet-built asset with uncertain demand — that signals greenfield, the higher-risk/higher-return bucket — versus an operating toll road with a regulated tariff, which is brownfield and income-like. A second pattern asks how investors access the asset: direct/private holdings are illiquid with high minimums, while publicly listed infrastructure (or MLPs) add liquidity but pull correlations toward equities.
The classic trap is conflating infrastructure with real estate — both are long-lived physical assets, but infrastructure’s edge is its regulated, low-elasticity cash flows, not rental NOI capitalized at a cap rate. Don’t confuse it with commodities either: infrastructure generates income, whereas commodities produce no cash flow and earn return from spot-price change plus roll yield (and collateral yield). Memory hook: “Green = to be Grown, Brown = already Built.”
A contractual period during which investors cannot redeem their capital from a fund.
The exam loves to bundle the three liquidity controls and ask which one does what: a lockup blocks redemption for a fixed initial term, a notice period delays an allowed redemption (typically 30–90 days), and a gate caps the fraction redeemed in any one window. A common item gives a redemption scenario and asks why investors stayed trapped in 2008 — the answer hinges on gates and side pockets, not the lockup, since by then many initial lockups had already lapsed. Another classic asks why hedge funds impose these terms; the “tell” is illiquid or hard-to-value positions that would force fire-sales if redemptions spiked.
Don’t confuse a hedge-fund lockup with the private-equity structure: PE investors face a multi-year capital-call/drawdown commitment with no redemption right at all, exited only through portfolio-company sales — a structural illiquidity, not a contractual gate. Also keep lockups separate from carried interest, which governs profit splits (the GP’s ~20% share), not liquidity. Memory hook: lock (entry), notice (exit warning), gate (exit cap) — three distinct doors, not one.
The year a private fund makes its first investment, used to compare performance across funds raised in the same market environment.
The exam’s classic setup gives you two funds with different IRRs and asks which manager performed better — the trap is comparing them head-to-head. The correct move is to benchmark each against its own vintage-year peer group (quartile rank), not against each other, because macro entry/exit conditions, not skill alone, drive much of the raw-return gap. Watch for the “same strategy, different years” tell: a buyout fund struck near a market peak faces high entry multiples, so its return reflects timing as much as the three buyout value levers (deleveraging, operational improvement, multiple expansion).
A frequent error is conflating vintage with the fund’s launch or final-close date — vintage is anchored to the first drawdown of capital, tied to the capital-call schedule of the J-curve, so it is fixed long before most committed capital is deployed. Don’t confuse vintage-year diversification (spreading commitments across years) with diversifying across strategies like buyout versus venture. Hook: think wine — judge each bottle only against its own harvest year.