CFA Level III: Private Markets Glossary
23 essential terms and definitions for CFA Level III: Private Markets. Each definition is written for exam preparation, covering the concepts as they are tested on the 2026 syllabus.
C
- Capital Call
- A capital call is the limited partner's obligation to fund committed capital when the general partner draws down to make investments or pay fund expenses. Timing is at the GP's discretion within the investment period and creates LP liquidity-management requirements.
- Carried Interest
- Carried interest is the general partner's share of fund profits, typically 20% above a preferred return hurdle. It is the primary performance incentive for the GP and is taxed as long-term capital gain under current US law subject to the three-year holding requirement.
- Catch-Up Provision
- A catch-up provision in the distribution waterfall allocates 100% of profits to the GP after the LP receives its preferred return, until the GP has caught up to its carried-interest percentage. After catch-up, distributions split at the carried-interest rate.
- Co-Investment
- A co-investment is a direct equity investment alongside the GP in a portfolio company, typically offered to large LPs of the fund. Co-investments are usually fee-free or at reduced economics, improving LP net returns relative to the fund vehicle alone.
D
- Distributed to Paid-In (DPI)
- DPI is the cash returned to limited partners divided by capital paid in. It measures realized return on deployed capital and grows over the fund's life as investments are exited.
- Distribution Waterfall
- A distribution waterfall is the contractual sequence governing how fund cash flows are split between LPs and the GP. Typical order: return of capital, preferred return to LPs, catch-up to GP, then carried-interest split. American (deal-by-deal) and European (whole-fund) variants differ in timing of GP carry.
- Due Diligence
- Due diligence is the research process before committing to a fund or making a direct investment. It covers strategy and edge, team and key-person risk, track record, terms and alignment, valuation policy, and operational integrity.
F
- Fund of Funds
- A fund of funds (FoF) allocates capital across multiple underlying private-market funds. It provides diversification, access, and selection expertise at the cost of an additional fee layer and an extra J-curve drag.
G
- General Partner (GP)
- The general partner is the manager of a private-market fund, responsible for sourcing, investing, monitoring, and exiting portfolio investments. The GP earns management fees and carried interest and bears unlimited liability in a traditional partnership structure.
- Growth Equity
- Growth equity is a minority-investment strategy that backs established, profitable private companies looking to scale. Risk and target return sit between venture capital (early-stage) and leveraged buyouts (mature, cash-flow heavy).
H
- Hurdle Rate (Preferred Return)
- The hurdle rate is the minimum return LPs must receive before the GP earns carried interest. Typically 7 to 8% IRR; some structures use a hard hurdle (carry only on returns above the hurdle) and others a soft hurdle with catch-up.
I
- Internal Rate of Return (IRR)
- IRR is the discount rate that sets the net present value of cash flows to zero. It is the canonical private-market return measure but is sensitive to timing and can be flattered by capital-call line usage that delays LP funding.
J
- J-Curve
- The J-curve describes the typical shape of a private-market fund's cumulative cash-flow profile: early negative returns from management fees and unrealized markdowns, then positive returns as investments mature and exit. The shape complicates short-term performance comparisons.
L
- Leveraged Buyout (LBO)
- A leveraged buyout is the acquisition of a company financed with a significant portion of debt, where the target's cash flows service that debt. Returns are driven by operational improvement, multiple expansion, and debt paydown.
- Limited Partner (LP)
- A limited partner is a passive investor in a private-market fund. The LP commits capital, receives distributions, and has limited liability for fund obligations but no role in day-to-day fund management.
M
- Management Fee
- The management fee is the annual fee paid to the GP for managing the fund. Typically 1.5 to 2% of committed capital during the investment period, often stepping down to a fee on invested or net invested capital after the investment period ends.
- Mezzanine Debt
- Mezzanine debt is subordinated debt that often carries equity warrants or conversion features. It sits between senior debt and equity in a leveraged capital structure and earns yields that reflect its junior position.
- Multiple on Invested Capital (MOIC)
- MOIC is the total value (distributions plus residual NAV) divided by capital paid in. It is a non-time-weighted measure of total return that complements IRR by ignoring timing.
P
- Private Credit
- Private credit is non-bank lending to private companies. It covers direct lending (unitranche and senior), mezzanine, distressed, and specialty finance, and has grown substantially since the post-2008 retreat of bank lending.
S
- Secondary Market (LP Stake Sale)
- The secondary market is where LPs sell their interests in existing funds to new buyers. It provides partial liquidity in an otherwise illiquid asset class and has become a meaningful source of price discovery and portfolio rebalancing.
T
- Total Value to Paid-In (TVPI)
- TVPI is total value (cumulative distributions plus residual NAV) divided by capital paid in. It is the canonical multiple-on-capital measure used alongside IRR in private-market performance reporting.
V
- Venture Capital (VC)
- Venture capital is equity financing for early-stage companies with high growth potential and high risk. Stages span pre-seed, seed, and Series A onward, with later rounds typically pricing on revenue rather than founding-team and idea.
- Vintage Year
- Vintage year is the year a fund made its first investment. Funds with the same vintage face similar market environments and are typically benchmarked against one another in performance comparisons.