CFA Level I 2025: Alternative Investments - Private Equity Basics & Misconceptions
- Dimitri Dangeros, CFA, CAIA
- 1 day ago
- 4 min read
Updated: 15 hours ago
Private equity (PE) remains a critical component within the CFA Level I Alternative Investments section, focusing on higher risk-adjusted returns, diversification, and long-term value creation. As PE continues to evolve in 2025, with increased integration of technology, dry powder accumulation, and a challenging exit environment, candidates must develop a comprehensive understanding of its fundamentals while critically assessing common misconceptions.
What is Private Equity? CFA Level I 2025 Alternative Investments - Private Equity
Private equity involves investment in companies that are not publicly traded, with the goal of enhancing value through operational improvements, strategic repositioning, and leverage before exiting through IPOs or sales. Structured typically as limited partnerships, private equity funds are managed by General Partners (GPs) who make decisions on behalf of Limited Partners (LPs), including pension funds, endowments, and sovereign wealth funds. PE funds generate returns through:
Revenue Growth: Expanding business operations.
Margin Improvements: Streamlining operations to improve profitability.
Debt Repayment: Using leverage to enhance equity value.
Multiple Expansion: Exiting at higher valuation multiples.
These elements align with the CFA curriculum, focusing on the clear distinction between alternative investment structures and traditional investment vehicles.
The Private Equity Lifecycle
Fundraising: GPs secure commitments from LPs, typically over a 10-year horizon.
Investment and Management: Funds are deployed across targeted acquisitions, often in leveraged buyouts, growth equity, or venture capital strategies, focusing on operational enhancement.
Exit: Exit strategies include IPOs, strategic sales, and secondary market sales. In 2025, with markets stabilising, Europe has led in exit activity, driven by policy shifts and improving investor sentiment. CFA Level I 2025 Alternative Investments - Private Equity
Industry Trends in 2025
Deal and Exit Environment
Deal Surge: Q1 2025 saw a 45% increase in deal volume, notably in aerospace, defense, and real estate sectors like data centres and student housing.
Liquidity Challenges: Despite increasing deals, traditional exit routes remain constrained, with many PE firms using continuation vehicles and NAV-based lending to maintain liquidity.
Dry Powder and Secondary Market
Global dry powder remains high, exceeding $1 trillion, reflecting both fundraising successes and slower deployment due to valuation challenges.
The secondary market continues to expand, allowing LPs liquidity through the sale of fund interests and providing flexibility to GPs amid longer holding periods.
Strategic Shifts
Operational Focus Over Financial Engineering: GPs are pivoting towards creating operational efficiencies as a sustainable value driver.
AI Integration: Technology is increasingly used in deal sourcing, due diligence, and portfolio management.
Private Credit Integration: PE firms are leveraging the growing private credit markets for deal structures.
Regulatory and Policy Shifts
PE firms are advocating for broader access to 401(k) plans, potentially unlocking substantial capital inflows.
Taxation on carried interest and regulatory clarity on fund structures remain areas of focus that can impact PE performance and attractiveness.
Misconceptions about Private Equity
Misconception | Reality |
PE always delivers high, market-beating returns | PE returns vary by cycle and strategy; they are not immune to market downturns. |
PE investments are uncorrelated with public markets | PE returns often correlate with economic cycles, and valuations can mask real volatility. |
Illiquidity premiums guarantee higher returns | Illiquidity may provide premiums but requires a long-term commitment and carries risk. |
PE is opaque and excessively risky | Transparency in reporting and regulatory oversight is improving within the industry. |
Performance Measurement in Private Equity
CFA Level I candidates should focus on the following performance metrics:
Internal Rate of Return (IRR): Reflects the annualised return, considering the timing of cash flows.
Multiple on Invested Capital (MOIC): Measures total value relative to invested capital.
Distributed to Paid-In (DPI): Measures capital returned to investors versus invested capital.
Total Value to Paid-In (TVPI): Sum of DPI and remaining value within the fund.
Understanding these metrics enables candidates to accurately interpret PE performance, which differs significantly from publicly traded securities.
Valuation and Liquidity Considerations
Private equity valuations are often based on models due to the absence of market prices, which can smooth volatility and affect perceived correlation with public markets. Liquidity remains a major consideration, as PE funds require long-term commitment from investors, making secondary markets crucial for managing portfolio liquidity.
Practical Takeaways for CFA Candidates
Develop clarity on PE fund structures and the roles of GPs and LPs.
Understand key performance metrics and how they differ from traditional investments.
Grasp the importance of liquidity management in PE and the role of secondary markets.
Stay updated on current industry trends, such as AI integration and evolving exit strategies.
Debunk myths by recognising the cyclical nature of returns and the realities of operational improvements versus financial engineering.
Private equity continues to adapt in 2025, reflecting market realities, technological integration, and a shifting regulatory environment. For CFA Level I candidates, mastering private equity means moving beyond theoretical knowledge to a practical understanding of how PE funds operate, how they generate returns, and the nuances that differentiate them from traditional assets. As the private equity industry navigates high dry powder levels, exit challenges, and operational shifts, professionals equipped with a strong grasp of these fundamentals will be better prepared for both their exams and careers in investment management.
Preparing for the CFA Exam?
Boost Your Success Rate with Swift Intellect — Try It Free for 14 Days (No Credit Card Required!)
Whether you're tackling the CFA Level 1 or CFA Level 2 exam, Swift Intellect gives you the edge with AI-powered learning, structured study tools, and real-time feedback.
Our platform is designed to cut study time, improve retention, and help you focus on exactly what you need to pass. Join thousands of candidates already using Swift Intellect to stay sharp and on track.
Why Choose Swift Intellect?
AI-Powered Learning Support
Daily Knowledge Refreshers
Real-Time Progress Tracking
Comprehensive Practice Tools – Question Bank & Mock Exams (Pro Plan)
Flexible Study Planning
Multi-Device Access
Community Access
Video Library
Start your 14-day free trial today — no credit card required — and boost your chances of passing smarter, faster, and more confidently.
Comments