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

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. Explore more PE valuation problems in our CFA Level II question bank.