Early losses and later distributions
Series XIX-A case study · set 3, case 4 of 5 · 4 questions · 1 mark each
Question 1 of 4Case practice
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The case · stays here for all 4 questions
An investor contributes ₹40 lakh to Willow Fund at the start of year one. At the first year-end there have been no distributions, and the investor’s net fund value is ₹36 lakh after start-up costs and valuation changes. During year two, the investor contributes another ₹20 lakh. By the second year-end, cumulative cash distributions are ₹10 lakh and remaining net value is ₹58 lakh. No outside investor expenses apply. The manager describes the early negative period as consistent with a possible J-curve pattern, but does not guarantee later recovery. For ratio questions, use cumulative contributions as paid-in capital and the second year-end figures unless a question says otherwise.
The two year-end values are hypothetical net estimates.
No exact dates within year two are provided.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
An investor contributes ₹40 lakh to Willow Fund at the start of year one. At the first year-end there have been no distributions, and the investor’s net fund value is ₹36 lakh after start-up costs and valuation changes. During year two, the investor contributes another ₹20 lakh. By the second year-end, cumulative cash distributions are ₹10 lakh and remaining net value is ₹58 lakh. No outside investor expenses apply. The manager describes the early negative period as consistent with a possible J-curve pattern, but does not guarantee later recovery. For ratio questions, use cumulative contributions as paid-in capital and the second year-end figures unless a question says otherwise.
The two year-end values are hypothetical net estimates.
No exact dates within year two are provided.
Q1What is the first year-end value change relative to the ₹40 lakh contribution?
Option A. A 4% decline.
Why it is wrong: The ₹4 lakh decline must be divided by ₹40 lakh.
Option B. A 10% gain.
Why it is wrong: The ending value is below the contribution.
Option C. No change until an investment is sold.
Why it is wrong: Net reported value can change before a cash sale.
Option D. A 10% decline. — Correct answer
Answer: D. The decline is (₹40 lakh − ₹36 lakh) ÷ ₹40 lakh × 100 = 10%. It combines the stated start-up costs and valuation changes. Remember: Early fund value can be below paid-in capital.
Hint, shown before you answer in practice mode: Compare the ending value with the initial contribution.
XIXA-S3-C04-Q1easynumerical
Q2What is cumulative paid-in capital at the second year-end?
Option A. ₹58 lakh
Why it is wrong: This is remaining value, not cumulative contributions.
Option B. ₹40 lakh
Why it is wrong: This omits the second contribution.
Option C. ₹50 lakh
Why it is wrong: This subtracts distributions from contributions. The denominator requested is gross paid-in capital.
Option D. ₹60 lakh — Correct answer
Answer: D. Paid-in capital = ₹40 lakh + ₹20 lakh = ₹60 lakh. The ₹10 lakh distribution is recorded separately, so it does not reduce this chosen denominator. Remember: Use a consistent paid-in-capital definition.
Hint, shown before you answer in practice mode: Add the contributions without netting distributions.
XIXA-S3-C04-Q2easynumerical
Q3What is second year-end TVPI, rounded to two decimal places?
Option A. 0.97×
Why it is wrong: This uses only the remaining ₹58 lakh value.
Option B. 1.70×
Why it is wrong: This divides by only the initial ₹40 lakh contribution.
Option C. 1.13× — Correct answer
Option D. 0.80×
Why it is wrong: This subtracts distributions from remaining value.
Answer: C. TVPI = (₹10 lakh + ₹58 lakh) ÷ ₹60 lakh = 1.1333…, or 1.13×. A large portion remains unrealised, so the multiple can change before final exit. Remember: Track realised and unrealised components of total value.
Hint, shown before you answer in practice mode: Add cumulative distributions and remaining value, then divide by paid-in capital.
XIXA-S3-C04-Q3mediumnumerical
Q4Which explanation of the J-curve is appropriate here?
Option A. The second-year TVPI proves every remaining valuation will be realised.
Why it is wrong: Marked remaining value is not cash already received.
Option B. Early costs and delayed value creation can create this shape, but it does not guarantee later gains. — Correct answer
Option C. J-curve language removes the need to investigate poor performance.
Why it is wrong: The investor still needs information about costs, investments and valuations.
Option D. The first-year loss guarantees a profitable exit.
Why it is wrong: A possible pattern cannot guarantee recovery.
Answer: B. The early negative value and later improvement are consistent with a J-curve narrative. The investor should still assess the causes and quality of valuations. The pattern itself guarantees no outcome. Remember: Use the J-curve as context, not as an excuse or guarantee.
Hint, shown before you answer in practice mode: A descriptive pattern is not a promise.
XIXA-S3-C04-Q4mediumapplication
Exit rights depend on the negotiated agreement
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