Distributed to Paid In (DPI) unwrapped – Breaking down the key private equity metric

You can buy bread with DPI.

…said an expert within the private equity field when explaining this metric to me. He said it to emphasize that DPI reflects the realized return from your private equity investment.

Along with IRR, RVPI, and TVPI, DPI is one of the most important metrics when evaluating the performance of your private equity investments.

You can become an expert in all these key metrics by reading articles on each one in our knowledge hub. We write all our articles based on a mix of our own expert knowledge, valid and respected sources, and interviews with experts in the field of interest.

Without further ado, let’s get started so you can get a solid understanding of DPI and how to utilize it.

(Oh, and if you’re wondering why the article photo is of a lemonade stand, read on to find out.)

Example of an overview of investments in four private equity funds

To make sure we’re on the same page, let me begin by showing you an example of an overview of investments in four private equity funds. That’ll give us a good foundation to build on.

Such an overview typically includes the vintage year, which is the year the fund was established, and the current market value of your investment in each fund. It also shows how much capital you already contributed to the fund and how much capital the fund already paid you in distributions.

DPI, IRR (Internal Rate of Return), RVPI (Residual Value to Paid In), and TVPI (Total Value to Paid In) are the four key metrics to use when evaluating your investments.

These overviews are crucial to continuously monitor the performance of the various funds and keep an overview of your unfunded commitments, so you always know how much liquidity you need to meet capital calls from the funds.

Now, let's focus on the metric discussed in this article — Distributed to Paid In — and what to be mindful of when applying it in your evaluation.

What does Distributed to Paid In reflect?

Distributed to Paid In is much easier to understand than, for instance, IRR (which is a quite complicated percentage metric that we have written an in-depth but understandable article about – available in our knowledge hub).

As the name suggests, DPI is a ratio metric that compares the fund’s capital distributions to you with your capital contributions to the fund.

That is, it measures the realized gain from your investment, and simply indicates how many times you have received your investment back in realized return at a given point in time.

Let’s say you give your kids $100 to buy lemons and sugar and sell lemonade in their little lemonade stand on the street for a while. They end up selling lemonade for $250.

Let’s also say that you’re quite the mean parent (shame on you) and you demand to get all of the money earned from selling lemonade. In that case, you would have achieved a DPI of 2.5 because you’ve gotten the $100 back 2.5 times.

Distributed to Paid In does not account for the fund's life cycle

The way private equity funds work is that they raise capital from investors, which they use to buy or invest in portfolio companies. Then, they help the company unleash its potential and sell it with a profit years later. As such, private equity funds usually don’t provide you with any return during the first years of their life cycle.

DPI does not factor this in, so when evaluating it for your private equity investments, keep in mind how long you’ve held the investment.

If you want to factor in the time element in your assessment of fund performance, comparing this metric across funds may not be meaningful unless they have similar vintage years. The figure will vary based on how far along the fund is in its life cycle. IRR may be a better metric to look at in this case as it takes into consideration how long time a fund has spent on creating its return and, therefore, is more comparable across funds.

You can compare DPI across funds if the time taken to generate returns is not crucial to you. However, be aware that comparing different types of funds can be problematic, as, for example, a capital fund and a venture fund have very different strategies and risk profiles.

A DPI higher than 1 indicates a realized profit

After your initial contribution to a private equity fund, the figure will be 0 since you have invested but not yet received any distributions from the fund.

A DPI of 1 means you have received exactly as much as you contributed.

A figure higher than 1 means you have received more than you contributed, indicating a profit on your investment. Conversely, if it’s lower than 1 means that, so far, you don’t have a positive realized return on your investment.

In other words, a DPI of, for example, 1.17 means your private equity investment has yielded a realized return of 17%.

A DPI of, for example, 1.17 means your private equity investment has yielded a realized return of 17%.

DPI can go lower than 0

You may think this metric cannot go lower than 0, but it can go low, low, lower than 0.

There are two scenarios where the fund could theoretically demand more capital than you committed:

Scenario 1: A fund does not consider management fees as part of your commitment. In this situation, capital calls covering management fees won't reduce your commitment to the fund. If the fund generates no returns, and you include management fees in your metric calculations, you could end up with a negative DPI. However, this is unlikely to happen in practice.

Let’s go back to the example with your kids. You’ve promised (committed) to paying them the $100 to buy ingredients (portfolio companies) for. However, since you’re being greedy and want to get all the revenue in the end, they at least want some money (management fees) for doing all the hard work with selling the lemonade.

They demand $10 for their work, and this money does not count as part of the $100 you promised for ingredients. Let’s say they spend all $100 dollars buying ingredients, making the lemonade, and setting up the stand, but no one buys any lemonade (poor kids). In that case, you get no return, and you also paid $10 extra. If you include the $10 in your calculation, you’ll have achieved a DPI of -0.1.

Scenario 2: You invest in a fund later than the original investors. In this case, many funds use so-called equalizations to ensure all investors contribute equally to expenses, compensating original investors for the dilution of their return caused by new investors. This is done through an equalization fee, which is paid by new investors but not included in their commitment.

So, let’s say you've had to pay an equalization fee, and the fund generates no returns; in that case your DPI would be negative. Makes sense?

I think this one will be too complicated to apply to the lemonade stand example (but hey, if you send me a personal request on email, I’ll take a shot at it).

Typically, you receive the first fund distribution when the first portfolio company is sold in the final phase of the fund’s life cycle. Therefore, it's natural for the metric to be lower than 1 in the fund's early years.

It's essential to be aware that some distributions can be recalled by the fund. This will be outlined in your Limited Partner Agreement (LPA) with the fund. Additionally, the fund informs you with each distribution whether it can be fully or partially recalled.

Typically, you receive the first fund distribution when the first portfolio company is sold in the final phase of the fund’s life cycle. Therefore, it's natural for the metric to be lower than 1 in the fund's early years.

The longer the fund is in its life cycle, the higher DPI should ideally be

The figure should ideally increase significantly in the final phase of a fund's life cycle. The further along the fund is, the higher the figure should be because it should have sold more portfolio companies by then.

When the fund closes, you’ll want a Distributed to Paid In above 1, indicating that you’ve received more money than you’ve contributed, thus making a profit on your investment.

While a fund is still active, remember that the metric only reflects realized returns and doesn’t account for the phase of the fund's life cycle or its overall lifespan. The metric should be interpreted in the light of this and considered alongside other private equity metrics to provide an accurate picture of the fund's performance.

When the fund is closed, however, Distributed to Paid In becomes a useful metric to inform you how many times you have recouped your investment.

When the fund closes, you’ll want a Distributed to Paid In above 1, indicating that you’ve received more money than you’ve contributed, thus making a profit on your investment.

Key takeaways

• The metric measures of the realized gain from your private equity investment.

• It indicates how many times you have recouped your investment at a given time.

• Ideally, the figure should begin to increase significantly when the fund reaches the last phase of its life cycle, and the further along the fund is in its life cycle, the higher the figure should be.

• When the fund closes, you’ll want a DPI above 1 as this means that you’ve made a profit on your investment.

• The metric doesn’t account for how long you've held the investment.

• If you want to consider the time factor when you evaluate fund results, you can’t compare DPI across funds unless they have similar vintage years, as the figure will vary depending on how far along the fund is in its life cycle. Also, be aware that comparing different types of private equity funds can be problematic.

I hope you’re left with a solid understanding of Distributed to Paid In and not just a craving for lemonade. If not, feel free to reach out with any questions you may have about the article or our private equity reporting.