CFM Investor Relations & Reporting 5 — Questions and Answers
Question 1: Which of the following is typically disclosed in Form ADV Part 2A (the 'brochure') that is most relevant to investor relations?
- The adviser's audited balance sheet
- Fees and compensation, conflicts of interest, and disciplinary history (Correct answer)
- Individual account performance since inception
- The names of all limited partners
Correct answer: Fees and compensation, conflicts of interest, and disciplinary history
Form ADV Part 2A is the narrative disclosure document that must describe fees, conflicts of interest, and disciplinary events in plain English.
Question 2: When calculating a fund's Distributions to Paid-In (DPI) ratio, which of the following is used as the numerator?
- Cumulative unrealized gains
- Cumulative cash distributions to LPs (Correct answer)
- Remaining NAV of the portfolio
- Total capital committed by LPs
Correct answer: Cumulative cash distributions to LPs
DPI equals cumulative cash distributions paid to LPs divided by total paid-in capital, measuring actual realized returns.
Question 3: An investor relations professional is reviewing a fund subscription agreement. The 'representations and warranties' section primarily protects the fund by:
- Capping the fund's liability for investment losses
- Confirming the investor is an accredited investor and meets other suitability criteria (Correct answer)
- Setting the clawback provision terms for returned carry
- Establishing the fund's right to charge management fees
Correct answer: Confirming the investor is an accredited investor and meets other suitability criteria
Investor representations and warranties confirm eligibility (accredited/qualified status), legal capacity, and compliance with applicable laws before admitting the investor.
Question 4: A fund manager prepares an Annual General Meeting (AGM) presentation. Which topic is most commonly addressed that is specifically required by best-practice LP governance standards?
- The GP's personal investment portfolio disclosures
- Portfolio performance, valuation methodology, and any material conflicts of interest (Correct answer)
- Detailed employee compensation structures within the fund
- The GP's pipeline of future fund launches
Correct answer: Portfolio performance, valuation methodology, and any material conflicts of interest
AGM best practices require covering portfolio performance updates, valuation methods, and disclosure of material conflicts per ILPA and industry norms.
Question 5: A GP is subject to a 'clawback' provision. In which scenario would this provision most likely be triggered?
- When the fund's IRR exceeds the hurdle rate in a single quarter
- When early profitable exits caused the GP to receive excess carry versus what it would have earned on the fund as a whole (Correct answer)
- When an LP defaults on a capital call
- When the fund's management fee income exceeds fund expenses
Correct answer: When early profitable exits caused the GP to receive excess carry versus what it would have earned on the fund as a whole
A clawback requires the GP to return previously distributed carried interest if early realizations resulted in carry payments exceeding what the GP was ultimately entitled to overall.
Question 6: Under Regulation D Rule 506(b), a private fund may sell securities to up to how many non-accredited but sophisticated investors?
- 0
- 35 (Correct answer)
- 100
- Unlimited, provided disclosure is made
Correct answer: 35
Rule 506(b) allows up to 35 non-accredited sophisticated investors, though most funds avoid this to simplify disclosure requirements.
Question 7: A fund's investor update reports a Public Market Equivalent (PME) of 1.25. How should this be interpreted?
- The fund returned 25 cents per dollar invested
- The fund outperformed a comparable public market index by generating 25% more value per dollar invested (Correct answer)
- The fund underperformed the public market by 25 basis points
- The fund's IRR was 25% annualized
Correct answer: The fund outperformed a comparable public market index by generating 25% more value per dollar invested
A PME above 1.0 means the private fund delivered more value per invested dollar than if the same capital had been deployed in the chosen public index.
CFM Investor Relations & Reporting 5
Which of the following is typically disclosed in Form ADV Part 2A (the 'brochure') that is most relevant to investor relations?