4.2 Measuring performance

Private equity performance is reported with a small set of figures: IRR, MOIC, DPI, RVPI and TVPI. They appear in every quarterly report, fundraising presentation and LP investment memo. Fund accountants calculate them, investor relations teams explain them, and LP analysts compare them across managers.

Each figure answers a different question. How fast did the money grow? How much did it grow? How much has actually come back as cash? This lesson works through all of them using Ashcombe Capital Fund I, the illustrative fund from lesson 2.2, and shows why two figures for the same fund can seem to disagree.

The fund we're measuring

Here again are Ashcombe Capital Fund I's illustrative cash flows ($m, $100m of commitments, end of year). "Called" includes management fees, because LPs pay those out of their commitments too.

Year	1	2	3	4	5	6	7	8	9	10
Called	20	25	20	15	5	0	0	0	0	0
Distributed	0	0	5	10	20	30	35	25	15	10

In total, LPs paid in $85m and received $150m. Because these are the LPs' own cash flows, after fees, expenses and carried interest, every fund-level figure in this lesson is a net figure.

The multiples: DPI, RVPI and TVPI

Three ratios compare what LPs have received, or still own, with what they have paid in. Paid-in capital is the total capital called from LPs to date.

• DPI (distributions to paid-in): distributions to date ÷ paid-in capital. It measures cash actually returned. It is sometimes called the "realized" multiple.
• RVPI (residual value to paid-in): NAV ÷ paid-in capital. NAV (net asset value) is the fund's estimated value of what it still holds, less its liabilities. RVPI is the "unrealized" part.
• TVPI (total value to paid-in): (distributions + NAV) ÷ paid-in capital. It is simply DPI + RVPI.

An interim view: end of year 5

At the end of year 5, LPs have paid in 20 + 25 + 20 + 15 + 5 = $85m and received 5 + 10 + 20 = $35m. Suppose the fund reports an illustrative NAV of $90m.

Measure	Working	Result
DPI	35 ÷ 85	0.41x
RVPI	90 ÷ 85	1.06x
TVPI	(35 + 90) ÷ 85	1.47x

A TVPI of 1.47x says the fund has turned each dollar paid in into about $1.47 of value. But only $0.41 of that is cash in hand. The other $1.06 is NAV, an estimate made by the GP (lesson 4.3 explains how). Until the companies are sold, it could turn out higher or lower.

This is why many LPs pay close attention to DPI. A high TVPI with a low DPI late in a fund's life can be a warning sign: the value is still on paper.

The final view: after year 10

By the end, every company has been sold and NAV is zero. So RVPI is zero and TVPI equals DPI.

Measure	Working	Result
DPI	150 ÷ 85	1.76x
RVPI	0 ÷ 85	0.00x
TVPI	(150 + 0) ÷ 85	1.76x

Notice that TVPI rose from 1.47x at year 5 to 1.76x at the end. In this example, the companies were eventually sold for more than their year-5 NAV suggested. That won't always be the case.

MOIC: the deal-level multiple

MOIC (multiple on invested capital) is total value divided by the amount invested. It is the same idea as TVPI, but it is usually used for a single deal or a portfolio of deals, rather than for the LPs' position in the fund.

In lesson 3.2, Ashcombe Capital Fund I invested $100m of equity in Northfield Components and received $200m when it sold the company five years later:

	Amount
Equity invested	$100m
Proceeds at exit (year 5)	$200m
Gross MOIC	200 ÷ 100 = 2.0x

For a deal still held, MOIC uses the current estimated value in place of proceeds, just as TVPI uses NAV.

IRR: allowing for time

A multiple ignores time. Doubling your money in two years is far better than doubling it in ten. The internal rate of return (IRR) fixes this. It is the annual rate of return that makes the present value of all the cash flows, in and out, add up to zero. Put simply, it is the compound annual growth rate of the money while it was invested.

For a single payment in and a single payment out, you can calculate IRR directly: (proceeds ÷ investment)^(1 ÷ years) − 1. For Northfield:

• (200 ÷ 100)^(1 ÷ 5) − 1 = 2^0.2 − 1 ≈ 14.9% a year.

Over exactly one year, it is even simpler: the gain divided by the investment.

A fund has many cash flows at different times, so there is no neat formula. In practice, IRR is calculated with a spreadsheet's IRR function (or XIRR, which uses exact dates). Using the annual net cash flows above (distributions minus calls each year) and assuming they happen at year-end, Ashcombe Capital Fund I's net IRR is about 14.75%.

An interim IRR, such as one reported at year 5, treats the current NAV as if it were a final distribution. So interim IRRs depend on NAV estimates in the same way that TVPI does.

Why IRR and multiples tell different stories

Compare two deals:

Deal	Invested	Returned	Holding period	MOIC	IRR
Quick deal	$100m	$130m	1 year	1.3x	30%
Northfield Components	$100m	$200m	5 years	2.0x	≈14.9%

The quick deal has twice the IRR. But Northfield made $100m of profit against the quick deal's $30m. Which is better depends on what the investor could do with the money in the meantime. If the quick deal's $130m can't be reinvested at a similar return, the investor may prefer the larger, slower gain.

Some practical consequences:

• High IRR, low multiple. Early distributions, including dividend recaps (lesson 4.1), can push IRR up while adding little to the multiple.
• Timing of calls. Some funds use subscription lines, short-term borrowing that delays capital calls to LPs. Calling capital later shortens the period the LPs' money is invested, which can raise IRR without changing the underlying deals much.
• Early in a fund's life, IRR can swing widely and is often negative because of fees and the J-curve (lesson 2.2), so it means little.

That's why LPs look at IRR and multiples together, and at DPI to see how much is real cash.

Gross versus net returns

Gross returns are measured at the deal or portfolio level: the cash the fund paid for its investments and the cash it received back. The Northfield figures (2.0x, about 14.9%) are gross.

Net returns are what LPs actually earn. Between gross and net sit:

• management fees, paid out of LP commitments whether or not deals succeed;
• fund expenses, such as audit, legal and administration costs;
• carried interest, the GP's share of profits (lesson 2.3).

So net returns are always lower than gross returns for the same fund, and the gap is usually larger for a successful fund because carried interest grows with profits. When comparing managers, make sure you are comparing net with net, over the same period and on the same basis. The fund-level figures above, DPI and TVPI of 1.76x and net IRR of about 14.75%, are net because they come straight from the LPs' cash flows.

Also remember that net returns are an average. Individual LPs can see slightly different figures if they joined at a later close or pay different fees.

Key terms

• Paid-in capital: the total capital called from LPs to date, including amounts used for fees.
• NAV (net asset value): the estimated value of a fund's remaining investments and other assets, less its liabilities.
• DPI: distributions to date ÷ paid-in capital; the realized, cash-back multiple.
• RVPI: NAV ÷ paid-in capital; the unrealized multiple.
• TVPI: (distributions + NAV) ÷ paid-in capital; equal to DPI + RVPI.
• MOIC: total value ÷ amount invested, usually for a deal or set of deals.
• IRR: the annual rate of return that sets the present value of all cash flows to zero; a time-weighted measure of growth.
• Gross return: return on the fund's investments before fees, expenses and carried interest.
• Net return: return to LPs after fees, expenses and carried interest.
• Subscription line: a short-term loan to a fund, secured on LPs' unfunded commitments, used to delay capital calls.

Key takeaways

• DPI shows cash returned, RVPI shows value still held, and TVPI is the two combined. At year 5 the fund was at 0.41x DPI and 1.47x TVPI; it finished at 1.76x.
• MOIC measures the size of a gain; IRR measures its speed. Northfield's 2.0x over five years is about 14.9%, while 1.3x in one year is 30%.
• Interim TVPI and IRR both rely on NAV estimates; only DPI is fully realized.
• Net returns are lower than gross because of fees, expenses and carried interest. Compare like with like.