An institutional investor is evaluating a private equity fund that specializes in venture capital. What is a key characteristic this investor should anticipate regarding the investment's liquidity and return profile?

Question: An institutional investor is evaluating a private equity fund that specializes in venture capital. What is a key characteristic this investor should anticipate regarding the investment's liquidity and return profile?

Answer options: ✅ High illiquidity with the potential for substantial long-term capital appreciation.

• Daily liquidity with consistent dividend distributions.
• Low risk with returns closely mirroring public market indices.
• Short investment horizon with guaranteed capital preservation.

Correct answer: High illiquidity with the potential for substantial long-term capital appreciation.

Explanation: Private equity investments, especially in venture capital, are inherently illiquid due to their private nature and lack of a public trading market. They typically involve a long investment horizon (5-10+ years) but offer the potential for significant capital appreciation if the portfolio companies are successful.