A CIO asks why your private equity sleeve shows a 1.8x TVPI but only a 0.6x DPI eight years in. The answer separates candidates who memorized acronyms from candidates who understand the J-curve.
Public markets are organized exchanges or quote-driven over-the-counter (OTC) venues with continuous price discovery, standardized disclosure (10-K, 10-Q, prospectus), and daily mark-to-market valuation. You can enter or exit in minutes at posted prices, transaction costs are 5-30bp, and regulators enforce uniform reporting under the 1933 and 1934 Acts.
Private markets lack continuous trading. Valuations come from quarterly appraisals using comparable transactions, discounted cash flows, or recent funding rounds. Disclosure is bilateral between GP and LP through private placement memoranda and quarterly LP reports. Exit requires a sale, IPO, recapitalization, or secondary transaction, typically taking 3-7 years per holding.
KEY: Public market returns reflect minute-by-minute investor sentiment. Private market returns reflect the GP's stale appraisal judgment until a realization event crystallizes value. Same underlying asset risk, very different reported return paths.
Common mistakes
- Treating commitment as paid-in capital. PIC is capital actually called and funded, not the committed amount. A $50M commitment with $45M called gives PIC of $45M, not $50M. Trap: candidates compute DPI as Distributions / Commitment, understating the realization multiple. The correct denominator is always called capital.
- Confusing TVPI with IRR. TVPI is a multiple (cash-on-cash). IRR is a time-weighted internal rate. A fund with 2.0x TVPI over 5 years has very different IRR than 2.0x TVPI over 12 years. Trap: ranking funds by TVPI alone ignores time value of money.
- Ignoring the J-curve when comparing young funds. A vintage-2024 fund showing -8% IRR in 2025 is not a failing fund, it is a fund in the normal early-life trough. Trap: candidates flag young funds with negative IRRs as underperformers without normalizing for vintage age.
Bottom line
- Private markets value via appraisals with illiquidity premiums of 200-400bp and 7-12 year lock-ups; public markets offer continuous mark-to-market pricing and daily liquidity
- TVPI = DPI + RVPI: DPI is realized cash, RVPI is unrealized NAV, TVPI the total multiple. A 1.8x fund split 0.6/1.2 is mid-life; 1.6/0.2 is harvested
- Access methods are direct, co-investment, fund commitment, fund-of-funds, and secondaries; direct demands scale, co-invest cuts fees, FoF buys diversification at a fee-on-fee cost
- Closed-end LPs with 10-year lives dominate PE and private debt; open-end funds dominate core real estate; evergreen vehicles are growing in private wealth
Exam shortcut
When a question gives you commitments, calls, distributions, and NAV, always compute PIC first (calls, not commitments), then DPI = Distributions/PIC, RVPI = NAV/PIC, TVPI = DPI + RVPI. The denominator never changes within a question. For SAA questions involving private markets, the trap answer uses reported volatility. The correct answer adjusts upward (unsmoothing) or downward-adjusts the Sharpe ratio before recommending an allocation.
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