Ending NAV of Fund Question

CFA Level III Portfolio Management
#1

Calixto reviews the endowment’s future liquidity requirements and analyzes one of its holdings in a private distressed debt fund. He notes the following about the fund:

  • As of the most recent year end:
    • The NAV of the endowment’s investment in the fund was €25,000,000.
    • All capital had been called.
  • At the end of the current year, Calixto expects a distribution of 18% to be paid.
  • Calixto estimates an expected growth rate of 11% for the fund.

Calculate the expected NAV of the fund at the end of the current year.

Answer from CFAI:

The expected NAV of the fund at the end of the current year is €25,258,050, calculated as follows:

First, the expected distribution at the end of the current year is calculated as
Expected distribution = [Prior-year NAV × (1 + Growth rate)] × (Distribution rate).
Expected distribution = [(€25,000,000 × 1.11) × 18%] = €4,995,000.
Therefore, the expected NAV of the fund at the end of the current year is
Expected NAV = [Prior-year NAV × (1 + Growth rate) + Capital contributions – Distributions)] × (1 + Growth rate).
Expected NAV = [(€25,000,000 × 1.11) + 0 − €4,995,000] × 1.11 = €25,258,050.

I don’t understand this. For my answer, I took the recent year ending NAV of 25,000,000 and multiplied by 1.11 and the subtracted the 18% distribution from there, for a final answer of 22,755,000.

25,000,000 * 1.11 = 27,750,000
27,750,000 * (1-0.18) = 22,755,000

Can anyone explain this one to me? Thanks!

#2

This is correct. The solution provided is wrong

1 Like
#3

Thank you fino, quick response is much appreciated as always.

1 Like
#4

I just had exactly the same confusion so thanks for posting this!

#5

I have emailed to CFAI with regards to the same question of calculating the NAV of the reason for having to included another “x 1.1” as the answer will be for next year’s end rather than current year end. But they yet to reply me…sigh

#6

6 years later…the error is still in the CFAI practice exam LOL

#7

6 years? I think you read the date wrongly. It’s March 13-14, 2021

#8

This threw me off as well.

But the same thing is done in Book 5, reading 27. On page 151, there is an example that does the exact same calcuation.

EXAMPLE 8

Liquidity Planning for Private Investments

1 The NAV of an investor’s share in a private renewable energy fund was
€30 million at the end of 2020. All capital has been called. The investor
expects a 20% distribution to be paid at the end of 2021. The expected
growth rate is 12%. What is the expected NAV at year-end 2022?

Solution to 1:
The expected NAV at year-end 2022 is €30,105,600. The expected distribution
at the end of 2021 is €6.72 million [(€30 million x 1.12) x 20%]. The NAV at
year-end 2021 is therefore [(€30 million x 1.12) - 20%] x 1.12% = €30,105,600.

#9

Check the Errata. It should be 2022 instead of 2021.

#10

Missed that one. All makes sense now.

1 Like
#11

End of Year NAV = [(Beginning NAV * (1+g)) + Contributions - Distributions] * (1+g)

#12

That should be incorrect. You have double-calculated growth.

#13

I thought the same thing but look at original post listing CFAI answer.
I ran across this in a practice test