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Investing in Private Equity (PE) requires a good  understanding of various performance metrics to effectively evaluate and manage investments. These metrics not only help investors assess the financial health and potential return of a PE fund but also come with inherent limitations that need to be understood for better decision-making. In this piece we look at the key PE metrics: Internal Rate of Return (IRR), Total Value to Paid-in Capital (TVPI), Distributed to Paid-in Capital (DPI), Multiple on Invested Capital (MOIC)and Public Market Equivalent (PME. Each metric offers different insights, and understanding their limitations is crucial for a comprehensive understanding  of investment performance.

1. Internal Rate of Return (IRR)

Explanation: IRR is a widely used metric in PE to measure the return  of an investment (could be a single investment or the whole fund), expressed as a percentage. It represents the annualised effective compound rate of return , making it a critical indicator of a fund’s performance. The IRR is calculated using the actual cash-flows (in and out).

Limitations: IRR assumes that all interim cash flows can be reinvested at the same rate as the IRR, this may not be possible in practice. . This can lead to misleading results, especially in cases where the cash flows are substantial. Additionally, IRR is  be sensitive to the timing of cash flows, meaning that the sequence in which returns are received can significantly affect the calculated IRR. Also the IRR may be calculated on estimated asset values not realised.

2. Total Value to Paid-in Capital (TVPI)

Explanation: TVPI, also known as the investment multiple or total value multiple, measures the total value created by the paid-in-capital . It combines realised and unrealised returns to provide a comprehensive view of the value created.. The difference from MOIC (see below) is that the numerator is the same (realised and unrealised gains) but denominator is the paid-in capital. This is the capital actually contributed by the LP into the fund (or deal), gross of any costs and expenses.  TVPI is typically used by the LP as it shows the value created with allowance of the ‘leakage’ due to costs and expenses. So for example if  the paid in capital as 100, with 98 invested in the deal and 2 allocated to costs/expenses then for TVPI the denominator would be 100 and for MOIC 98.

Limitations: Although TVPI is useful for assessing overall value creation, it doesn’t provide insights into the timing of returns nor the  liquidity of the investment. A high TVPI might suggest strong performance, but it is silent on the time period over which the value was created. . .

3. Distributed to Paid-in Capital (DPI)

Explanation: DPI focuses on the liquid part of the returns by measuring the cash distributions to investors relative to the capital they have paid into the fund. It’s a crucial metric for understanding how much cash has actually been returned to investors.

Limitations: While DPI is useful for assessing the liquidity of returns, it does not account for the remaining unrealised value in the portfolio. Consequently, DPI can underrepresent the overall performance of a fund, especially if significant assets are still held and not yet liquidated.

4. Multiple on Invested Capital (MOIC)

Explanation: MOIC calculates the total value returned to investors relative to the total capital invested, without accounting for the time value of money. It provides a simple and straightforward measure of how much money was made on an investment in absolute terms.

Limitations: Similar to TVPI, MOIC does not consider the time period over which the value was created . A high MOIC could be achieved over an excessively long period, which, when adjusted for time value, may not be as impressive. This makes MOIC a less suitable metric for comparing investments across different time horizons. The difference to TVPI (see above) is that the denominator is the Total Investment (after costs, expenses). MOIC is typically used by the Fund as it shows the value created by the fund or deal based on the actual amount invested.  

5. Public Market Equivalent (PME)

Explanation: The metrics above seek to assess the success of the PE funds ( or the individual deals). PME seeks to do something different. It seeks to assess, to   benchmark, the decision to allocate  to PE. It does so by theoretically investing the actual cash-flows under public market conditions. To answer the questions ‘what would the return have been if the cash-flows were allocated to the public equity market of choice?’

It is a way of    benchmarking the performance of a PE investment to a public index (like the MSCI World Index or the FTSE – All Share I), critically by applying the same cash-flows as the PE fund to the public market.  As such it does seek to provide an ‘apples to apples’ assessment.

Limitations: Public equity indices can perform very differently (eg the recent performance of the S&P versus the FTSE – All Share). The choice of the index can lead to different conclusions. Also this is a mathematical construct as the cadence of cash-flows into a public market is unlikely to be the same as that of PE fund investment (driven by a different set of dynamics).  understand this – Divyesh] –


These metrics, each with its distinct focus, collectively provide a comprehensive toolkit for evaluating PE investments. However, the limitations associated with each metric necessitate a cautious approach. Investors should employ a combination of these metrics to gain a balanced and thorough understanding of their PE investments, adjusting their strategies based on a nuanced interpretation of what these metrics reveal about the underlying value and performance of their investments. Understanding both the insights and the limitations of these metrics will enable investors to navigate the complexity of   private equity investing with greater confidence and success.

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