Private Equity Fund Performance Metrics: TVPI vs. MOIC vs. DPI and Gross vs. Net IRR

Private Equity Fund Performance Metrics Definition: When evaluating the performance of a private equity (PE) fund, some of the most important metrics include the Total Value to Paid-In Capital (TVPI), or Net Value / Called Capital, Distributions to Paid-In Capital (DPI), or (Realizations – Realized Carried Interest) / Called Capital, the Gross MOIC, or Total Gross Value / Invested Capital, and the Gross and Net IRR, which measure the annualized returns of the fund before or after fees and carried interest.

As you can see, there are many PE fund performance metrics, so people often debate which metric is “best” for judging funds and making investment decisions…

…but this is the wrong question to ask.

The right questions to ask are:

1. What stage is the fund at, and which investment strategies is it using (e.g., traditional buyouts vs. growth equity vs. credit)?
2. What assumptions support these performance metrics? Is the fund valuing its portfolio companies and awarding compensation based on reasonable data?

As a simple example, many articles have claimed that Distributions to Paid-In Capital (DPI) is “the best” metric for evaluating PE fund performance because it measures “cash in vs. cash out” and, therefore, cannot be manipulated in the same way as metrics such as IRR or TVPI.

This is because DPI is based on the investments + management fees (cash in) vs. the exit proceeds minus the distributed carried interest (cash out).

But the problem is that DPI only means something for funds that are later in their lifecycles, such as for 10-year funds that are in Year 5 or later and are mostly done investing.

But as an investor in PE funds, you often need to evaluate performance before that 5-year mark and make decisions based on the fund’s performance so far.

Therefore, metrics such as the TVPI, Gross MOIC, and IRR that factor in realized and unrealized gains are extremely important.

To illustrate these concepts, we’ll walk through a simplified example of a PE fund’s investment, fee, and exit profile for 10 portfolio companies over a 6-year period.

Files & Resources:

• Simple PE Fund Performance Metrics (XL)
• Private Equity Fund Performance Metrics – Slides (PDF)

Video Table of Contents:

• 0:00: Introduction
• 1:40: Summary of Gross IRR and MOCI, TVPI, Net IRR, DPI, and RVPI
• 6:27: Metrics’ Interpretation
• 7:57: Part 1: Fee Calculations and Formulas
• 12:05: Part 2: The “Net” Metrics (TVPI, DPI, and Net IRR)
• 14:18: Part 3: Valuations, Waterfalls, and Recycling
• 16:27: Recap and Summary

Private Equity Fund Performance Metrics: Gross MOIC and Gross IRR

The simplest metrics to calculate and understand are the Gross Multiple of Invested Capital (MOIC) and the Gross Internal Rate of Return (IRR).

They are before management fees and carried interest, so you can simply use the investments, unrealized values, and realized values to calculate them.

Here’s an example from the 6-year example period used here:

This tells us that the fund has created portfolio company value that’s worth approximately twice the capital it has invested so far.

However, there has been only one realization or sold portfolio company, so this is just an estimate and will change significantly over the next few years.

For the Gross IRR, which represents the approximate annualized return before management fees and carry, you can use the built-in IRR function since these are regular dates that are always one year apart:

Private Equity Fund Performance Metrics: TVPI vs. DPI and Gross vs. Net IRR

To move beyond these simple metrics, you need to track the management fees and carried interest, including the accrued carry that has not yet been distributed.

That’s because the Total Value to Paid-In Capital, Distributions to Paid-In Capital, and Net IRR numbers factor in fees to provide a more accurate estimate of what the Limited Partners in the fund might earn.

For example, if a PE fund invests $1 billion in a company, and this investment grows to $2.5 billion over 5 years, that is an investment profit of $1.5 billion.

However, the PE fund has not yet sold the company, so it cannot distribute any portion of this to the Partners and other professionals at the fund.

Instead, it will record something under “Accrued Carry” to recognize this estimate of a future payout.

If the carried interest is 20% of the investment profits, the calculation is:

($2.5 billion – $1.0 billion) * 20% = $300 million for the Accrued Carry.

But this is not quite accurate because there are also management fees, normally equal to 2.0% of the fund’s committed capital in the investment period, falling to 1.0% or 1.5% of the remaining portfolio’s cost basis after the investment period.

These fees are normally allocated to specific portfolio companies, and investment profits must be measured relative to both invested capital and these fees.

Collectively, the invested capital + the management fees are referred to as the “called capital” of the PE fund.

For example, with the numbers above, let’s say that there’s $50 million in management fees allocated to this one company. That changes the Accrued Carry calculation as follows:

($2.5 billion – $1.0 billion – $50 million) * 20% = $290 million.

You can see the calculations for the management fees in the PE fund model in this article here:

To allocate the fees to specific companies, you might take a time-weighted average over the holding period, linked to each company’s contribution to the total cost basis:

You must make these calculations for the entire set of portfolio companies and factor in the carried interest that has already been paid out on realized investments, if applicable.

Doing this in real life gets complicated because many funds use waterfall structures and preferred returns or hurdle rates that require a certain minimum performance level before they can distribute carried interest.

To continue with this simplified example, though, we can calculate the TVPI, DPI, and other metrics by starting with a few supplemental figures:

Gross Value = Fair Market Value of Entire Remaining Portfolio + Previous Realizations.

Net Value = Gross Value – Realized Carried Interest – Accrued Carried Interest.

Invested Capital = Total Amount Invested in Portfolio Companies BEFORE Fees

Called Capital = Invested Capital + Management Fees

The Realized Carried Interest is based on the one portfolio company that has been sold for $1.4 billion (CyberSentinal AI), minus the $400 million investment into it, minus the $63 million in management fees allocated to it, all times 20%:

The Accrued Carried Interest for the remaining portfolio is based on the Unrealized Values minus the Total Investments minus the Remaining Management Fees, all times 20%.

You can simplify this calculation by basing it on the Gross Values and Called Capital and subtracting the portion that has been realized or distributed:

The TVPI is then based on the “Net Value” number divided by “Called Capital,” and the DPI is based on (Realizations – Realized Carried Interest) / Called Capital:

The Residual Value to Paid-In Capital (RVPI) equals the TVPI minus the DPI and gives you a sense of how much fund value remains to be realized.

The higher the RVPI, the more speculative the fund’s performance because much of it is based on unsold companies.

Finally, the Net IRR is what it sounds like: The annualized rate of return so far after fees and carried interest, counting both realized and unrealized companies.

How to Interpret Private Equity Fund Performance Metrics

So, what can we say about this simple PE fund with a 1.9x Gross MOIC, 21% Gross IRR, 1.5x TVPI, 15% Net IRR, 0.2x DPI, and 1.3x RVPI?

The answers go back to those questions at the beginning:

1. What stage is the fund at, and which investment strategies is it using (e.g., traditional buyouts vs. growth equity vs. credit)?
2. What assumptions support these performance metrics? Is the fund valuing its portfolio companies and awarding compensation based on reasonable data?

This is an upper-middle-market private equity fund by most definitions, since it has $5.7 billion in committed capital and has invested between $400 and $700 million in each company.

We don’t know its exact strategies, but it is likely executing a mix of traditional buyouts and growth-equity deals from the names and industries here.

We have no idea which assumptions underpin this performance, as the fund does not disclose the valuation multiples used to estimate the unrealized portfolio companies’ values.

If we ignore that large issue and believe that these valuations are reasonable, this fund seems to be a solid, but not spectacular, performer.

It is outperforming most public markets, such as the S&P 500, but not by a huge margin, and the Gross – Net Gap in the IRR calculation is as expected: Between 6 and 7%.

So, the fees and performance seem on par with those of most private equity funds in this size range.

The 0.2x DPI might seem concerning, but remember the timing: This is only Year 6 of a 10-year fund.

We would expect the DPI to be quite low at this point and to gradually increase until it equals the TVPI by the end of the fund’s life.

By contrast, 0.2x DPI in Year 10 of the fund would be a giant red flag.

What Makes PE Fund Performance Metrics More Complicated: Valuation Assumptions, Waterfalls, and More

In real life and in fund-of-funds case studies, calculating these PE fund performance metrics can be significantly more complex.

First, you may have to review the fund’s valuation assumptions for each unrealized company and challenge them based on your own research.

For example, if the PE fund claims that it owns an HVAC company worth 20x EBITDA, but your public comps in the sector show that a 15x median multiple, you might adjust down the valuation of this portfolio company.

Across the PE fund’s entire portfolio, these adjustments could make a significant difference in the TVPI and IRR metrics.

Also, nearly all PE funds have minimum return requirements (called “hurdle rates” or “preferred returns”) that they must achieve before they can distribute carried interest.

Normally, the Limited Partners in the PE fund must earn back their capital first, then earn the preferred return (often ~8%), before the General Partners can earn carry.

Once the fund reaches this level and the LPs earn the preferred return, the GPs are “caught up,” and the remaining investment profits are split 80/20 between the LPs and GPs.

Here’s an example of such a waterfall schedule for the fund described above:

Adding to the complications, there are also European and American waterfall structures for PE funds.

Under the European structure, the hurdle rate and carried interest are based on the entire fund, so nothing can be distributed to the GPs until a minimum fund-wide performance threshold is met.

But under the American structure, these are based on individual portfolio companies, so you must set up a separate waterfall schedule for each company.

You can copy and paste the same schedule and adjust the numbers, but it adds to the time required to check the model.

One final complication is that there are also additional fund terms and policies in real life, such as clawbacks and recycling.

“Recycling” means that the PE fund may take an early distribution from a portfolio company sale and re-invest the proceeds in additional companies, which changes the math for the invested and called capital.

If a PE fund using the American waterfall structure distributes carried interest for one company but then the entire fund underperforms, there may be a clawback requiring the PE Partners to return their carry to the LPs.

These types of terms, penalty fees, and added nuances all make the real-life setup more complex.