Does a private wrapper pay you enough to justify its lock-up and its fees? You will need several tools to answer that question for yourself: PME (in both KS and LN forms), the interim IRR, the multiples suite (TVPI, DPI, RVPI), and a working understanding of why aggregating IRRs across funds breaks.
Evidence on illiquidity premium from listed assets. Before comparing private to public, liquid markets already price illiquidity. You can measure the premium without ever buying a PE fund.
What illiquidity means. An illiquid holding creates an exit trade-off between waiting and accepting a worse price. Urgency sharpens that trade-off: a faster exit may require accepting a substantial discount. You can view illiquidity in two ways:
- Time. How long you need to close the position at a price that urgency does not affect.
- Value. How much price you give up by closing urgently instead of patiently.
Why a private wrapper might earn more. If private structures earn higher risk-adjusted returns, that edge must come from somewhere.
Common mistakes
- Treating the simple IRR average as the portfolio IRR. For the Example 2 table, the equal-weighted average is 15.2%. The equal-weighted and commitment-weighted averages are legitimate measures of selection and sizing skill, but neither generally equals the pooled portfolio IRR.
- Treating TVPI and DPI as interchangeable. A 2.50x TVPI with 0.13x DPI (Fund C) is 95% unrealized. A 1.98x TVPI with 1.77x DPI (Fund A) is 89% realized. Comparing the two by TVPI alone hides how much of Fund C's value is still paper.
- Forgetting the terminal NAV. A fund mid-life with distributions of $60M and NAV of $80M on $70M paid-in is badly understated if you omit the NAV. Both the KS-PME numerator and the fund's IIRR need it.
Bottom line
- Illiquidity costs time or value; listed markets already price it.
- Private wrappers can add value, but fees can capture it; risk-adjusted real estate studies favor listed REITs.
- IIRRs and LN PME IRRs can have multiple roots or none; SLOCs can push reported IRR either way.
- KS-PME above 1 beats the matched index but may not cover beta or illiquidity (Kauffman: 1.34).
Exam shortcut
Memory aid: "TVPI splits into DPI (cash in your hand) and RVPI (paper still in play)."
The full lesson (about 5,932 words, 40 min read) adds 2 worked examples, a self-check, free in the app.
Learning objectives
- replication overview
- case for replication
- replication benefits
- factor replication
- algorithmic replication
- private vs listed
- unlisted re funds
- pe re performance drivers
- listed re funds
- investing commodities
- etns private commodities
- leveraged option commodities
- managing commodity exposure
- accessing digital assets
- overview tokenization
- tokenization process
- legal regulatory considerations tokenization
- risk considerations tokenization projects
- step-by-step tokenization example
- case studies tokenization
- illiquidity premium listed
- private vs listed re perf
- pme challenges
- multiple eval tools
- irr aggregation
- private fund considerations
Browse all free CAIA Level II lessons or jump into free CAIA Level II practice questions.