Free CFA Level III: Private Markets Private Equity Practice Questions
Private equity on CFA Level III covers leveraged buyout (LBO) strategies, venture capital stage financing, growth equity, PE fund valuation methods (comparable, precedent, DCF), and performance measurement using IRR and multiples.
Sample Questions
Question 1
Easy
The primary role of leverage in a PE buyout is to:
Solution
C is correct.
Leverage in an LBO reduces the amount of equity the PE firm must invest, allowing the same fund to make more investments. It also amplifies equity returns: if the company's assets generate returns above the cost of debt, the excess accrues entirely to equity holders. Combined with the tax shield from interest deductions, leverage is a fundamental tool in buyout value creation.
Leverage in an LBO reduces the amount of equity the PE firm must invest, allowing the same fund to make more investments. It also amplifies equity returns: if the company's assets generate returns above the cost of debt, the excess accrues entirely to equity holders. Combined with the tax shield from interest deductions, leverage is a fundamental tool in buyout value creation.
Question 2
Medium
A growth equity investment is most clearly distinguished from a buyout investment by:
Solution
B is correct.
Growth equity investments typically involve minority (non-controlling) stakes in companies with strong revenue growth and proven business models. Little or no leverage is used because the company's value proposition is revenue growth, not financial engineering. Buyouts, by contrast, involve controlling stakes with substantial leverage, targeting more mature companies where operational improvements and financial optimization drive returns.
Growth equity investments typically involve minority (non-controlling) stakes in companies with strong revenue growth and proven business models. Little or no leverage is used because the company's value proposition is revenue growth, not financial engineering. Buyouts, by contrast, involve controlling stakes with substantial leverage, targeting more mature companies where operational improvements and financial optimization drive returns.
Question 3
Hard
Based on Exhibit 2, the share of total equity value creation in the Aurora Logistics buyout attributable to EBITDA growth (decomposed at the entry multiple) is closest to:
Solution
B is correct. Decomposing equity value creation at the entry multiple: EBITDA growth = ($112M − $80M) × 7.0 = $224M; multiple expansion = (7.5 − 7.0) × $112M = $56M; debt paydown = $140M. Total = $420M, which reconciles to exit equity $616M minus entry equity $196M. EBITDA growth share = $224M / $420M ≈ 53.3%.