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Q & A — 14 November 2024

How do we measure the performance of a private equity investment?

Find out how to measure private equity performance using reliable and relevant indicators: TVPI, DPI, RVPI, IRR and MOIC.

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What are the indicators?

Private equity performance is measured using a number of specific financial indicators, tailored to the nature of these long-term investments. Here are the main tools used to assess the profitability of this type of investment in unlisted assets:

1. TVPI (Total Value to Paid-In)

-Definition: This is a fundamental measure for evaluating the performance of a private equity fund: TVPI represents the ratio between the total value created by the fund (sum of realised distributions and the residual value of the portfolio) and the capital invested by investors (paid-in capital).

-Formula: TVPI = (Net assets + amounts distributed) / capital invested.

-Interpretation: A TVPI greater than 1 is an indicator of good performance because it means that the private equity fund has created value for investors. For example, a TVPI of 1.5 means that for each euro invested, the investor recovers €1.50.

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2. DPI (Distributed to Paid-In)

-Definition: This ratio measures the amounts actually distributed to investors as a proportion of the capital invested.

-Formula: DPI = Amounts distributed / Capital invested

-Interpretation: DPI provides an understanding of the proportion of initial capital invested that has been returned to private equity investors in the form of cash. If the DPI is greater than 1, then the fund has distributed more to investors than the capital they invested. The fund has thus generated positive cash flow.

3. RVPI (Residual Value to Paid-In)

-Definition: It measures the proportion of value still present in the portfolio (not realised) in relation to the capital invested. This ratio is particularly useful for assessing the performance of a private equity fund at a given point in time, before all investments have been realised.

-Formula: RVPI= Net assets / Capital invested

-Interpretation: This ratio shows the proportion of capital that is still ‘employed’ and not redistributed. It provides an indication of the fund's current performance in terms of the residual value of investments. If RVPI > 1: This means that the residual value of investments is greater than the capital invested. This is generally a good sign, indicating that the fund has generated value for its investors.

4 IRR (Internal Rate of Return)

-Definition: this rate measures the average annual return on investments, made up of negative flows (investments) and positive flows (divestments and market value of investments not sold). It is used to measure and monitor the performance of private equity operations. It helps to understand the expected return on an investment.

-Interpretation: IRR takes into account the time value of an investment.

5. MOIC (Multiple on Invested Capital)

-Definition: The MOIC measures how many times the initial investment has been multiplied at the end of the fund, without taking into account the time elapsed.

-Formula: MOIC= (Net Assets + Distributions) / Invested Capital

-Interpretation: A MOIC of 2x means that the investment has doubled in value. The MOIC is often used in conjunction with other performance ratios such as the DPI (Distributed to Paid-In) and TVPI (Total Value to Paid-In) to obtain an overview of a private equity fund's performance. DPI measures distributions made in relation to capital invested, while TVPI measures total value (distributions + residual value) in relation to capital invested.

Key points :

-TVPI and IRR are the indicators most often used to measure the overall performance of a private equity fund.

-IRR takes into account the timing of cash flows, while TVPI shows total value creation.

-DPI shows how much has actually been redistributed to investors, while RVPI shows the residual value still in the portfolio.

These measures help investors to assess the performance of private equity funds by taking into account the duration of the investment, the timing of distributions and value creation.

Q & A

How much to invest in private equity

As the private equity market opens up to a much wider audience, the question of the ideal amount to invest is being asked more and more frequently.

Q & A

What is a private debt fund and how to invest?

Find out how a private debt fund works in France, its characteristics, advantages and associated risks, and how it differs from a private equity fund.

Q & A

Is there a good market timing in private asset investments?

Private equity investors often ask the question: is there such a thing as good market timing? In the unlisted sector, there are significant differences in performance between managers. And with interest rates rebounding, selectivity is all the more crucial. In particular, you need to identify whether now is the right time to gain exposure to a particular strategy. When it comes to unlisted investments, the notion of ‘market timing’ does not have the same meaning as it does on the stock market.