How do you evaluate PE fund performance using IRR, TVPI, and DPI — and which metric matters most?

Question

AcadiFi · Accepted Answer

Private equity fund performance measurement is a core Level II topic. Unlike public market investments where you simply look at time-weighted returns, PE funds require specialized metrics because of irregular cash flows and the J-curve effect.

**Key Metrics:**

**1. IRR (Internal Rate of Return)**
- The discount rate that makes the NPV of all cash flows (capital calls and distributions) equal to zero
- Sensitive to timing — a fund that returns money quickly will have a higher IRR than one that returns the same total but over a longer period

**2. TVPI (Total Value to Paid-In Capital)**
- TVPI = (Cumulative Distributions + Remaining NAV) / Cumulative Capital Calls
- Measures total value creation as a multiple of invested capital
- Includes unrealized value (NAV)

**3. DPI (Distributions to Paid-In Capital)**
- DPI = Cumulative Distributions / Cumulative Capital Calls
- The "cash-on-cash" return — only counts actual money returned to LPs
- Also called the "realization ratio"

**4. RVPI (Residual Value to Paid-In Capital)**
- RVPI = Remaining NAV / Cumulative Capital Calls
- Represents unrealized value still in the fund
- TVPI = DPI + RVPI

**Worked Example:**
SummitPoint Capital Fund III has the following profile after 7 years:

| Year | Capital Called | Distributions |
|---|---|---|
| 1 | $25M | $0 |
| 2 | $35M | $0 |
| 3 | $20M | $0 |
| 4 | $0 | $12M |
| 5 | $0 | $28M |
| 6 | $0 | $45M |
| 7 | $0 | $38M |

- Total called: $80M
- Total distributed: $123M
- Remaining NAV: $52M

**Calculations:**
- **DPI** = $123M / $80M = **1.54x** — LPs have gotten back 154% of invested capital in cash
- **RVPI** = $52M / $80M = **0.65x** — 65% of invested capital remains as unrealized value
- **TVPI** = 1.54 + 0.65 = **2.19x** — total value is 2.19 times invested capital
- **IRR** = ~22.4% (calculated by solving for the discount rate across the cash flow stream)

**When IRR and Multiples Diverge:**

A fund can have a high IRR but low DPI when:
- It's still early in the fund life (years 1-4) — the J-curve means initial investments haven't matured
- The GP used subscription line financing to delay capital calls, artificially boosting IRR timing
- Most value is unrealized (high RVPI)

Conversely, a fund can have a moderate IRR but high DPI when it took longer to exit investments but ultimately returned large multiples.

**Which Metric Matters Most?**
- **DPI is king for mature funds** (year 7+). As the saying goes, "You can't eat IRR." Cash distributions are what matter.
- **IRR** is useful for comparing funds of similar vintage and strategy, but can be manipulated through timing
- **TVPI** is the most comprehensive for funds still in their investment period
- **RVPI** should be viewed skeptically — NAV estimates are set by the GP and may be optimistic

**Exam Tip:** CFA Level II loves to present a scenario where IRR looks attractive but DPI is low, then ask what risk the LP faces. The answer is always realization risk — the unrealized value may not materialize.

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How do you evaluate PE fund performance using IRR, TVPI, and DPI — and which metric matters most?

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