Total Value to Paid In (TVPI) decoded: Understanding key private equity metrics

Distributed to Paid In (DPI) + Residual Value to Paid In (RVPI) = Total Value to Paid In (TVPI).

I could end the article here, but I don’t think that would be fair. You probably didn’t come here for just one sentence. Jokes aside, while TVPI is a fairly simple metric, I believe it deserves some context and a little further explanation.

Let’s get to it.

These metrics are part of a comprehensive private equity overview

We’ll begin with some context – that’ll give us a good foundation to build on. I want to start by showing you an example of an overview of investments in four private equity funds.

In the second column from the left, the year of the fund's establishment is indicated – also referred to as the vintage year. Following that, the market value of your investment in the fund is provided. The report also offers an overview of your commitments and unfunded commitments, as well as your contributions to (Paid in) and distributions from (Paid out) the funds.

Additionally, the overview shows the four key private equity metrics: DPI, RVPI, TVPI, and IRR. In our knowledge hub, you can find in-depth explanations of the other three of the four key metrics.

Return represents your total return on the investment – the sum of what you have received from the fund, combined with the unrealized value of your investment in the fund, minus what you have contributed to the fund.

While these metrics are part of the reporting for the majority of private equity funds, it's important to be aware that the calculation basis for these figures may vary from fund to fund. We delve into this challenge in detail in our article on how to create a comprehensive private equity overview.

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

Without further ado, let’s get down to business.

What does Total Value to Paid In reflect?

The way private equity funds work is that they raise capital from investors, which they use to buy or invest in portfolio companies. Subsequently, the funds assist the companies in realizing their potential and eventually sell them for a profit after several years.

The fund doesn’t acquire or invest in all the portfolio companies simultaneously, nor does it sell them all again at the same time. Consequently, at some point during the lifespan of a fund, you’ll begin to have both an unrealized return and a realized return on your investment. These are typically reported to you as RVPI and DPI, respectively.

You can look at RVPI and DPI separately, but you may also like to get an overview of your total return. That is, your realized return plus your unrealized return.

Enter Total Value to Paid In.

TVPI tells you how many birds you have in your hand and in the bush (if you don’t get this reference, it means you didn’t read the article on RVPI).

In simple terms, it’s the sum of DPI and RVPI, and it indicates the total return on your investment. It’s a ratio metric that indicates how many times you've recouped your investment in both realized and unrealized returns.

Let’s swing back to the lemonade example from our DPI article: You dish out $100 to your kids for lemons and sugar, and they whip up a lemonade stand. Midway, they've used half the cash and made $125 in sales.

Let’s also say you’re the parent who wants it all and you demand to get all of the money earned from selling lemonade. The $125 gives you a DPI of 1.25 because you’ve gotten the $100 back 1.25 times.

Assuming your kids can pull off another round of $125 sales with the ingredients they buy with the money they have left, the lemonade business has a market value of $125 and an RVPI of 1.25.

As such, at this point, your TVPI of your investment in the lemonade stand is: DPI of 1.25 + RVPI of 1.25 = 2.5.

TVPI is the sum of DPI and RVPI, and it indicates the total return on your investment. It’s a ratio metric that indicates how many times you have recouped your investment in both realized and unrealized returns.

How TVPI develops throughout the fund's life cycle

Since TVPI accounts for both your realized and unrealized returns, the metric should generally increase as the fund progresses through its life cycle and does its magic with the portfolio companies and later exits them with a profit.

When the fund is closed, TVPI and DPI should be equal, as all investments are realized at this point. Like DPI, TVPI ideally should be above 1 after the fund is closed, indicating that you’ve made a profit on your investment.

It's important to note that, like DPI and RVPI, TVPI doesn’t consider the time period of the investment. If you want to factor in the time element in evaluating your investment, you can’t compare TVPI across private equity funds – unless, to a certain degree, they have similar vintage years – as the figure will vary depending on how far along the funds are in their life cycles.

You can compare TVPI across funds if the time spent generating returns is not crucial to you, or if you want to compare how many times you've recouped your investment in monetary terms across different funds.

The best metric for comparing the different funds’ performance while taking into consideration how long you’ve held the investment is the funds’ Internal Rate of Return (IRR). Read more about this crucial metric in our knowledge hub.

However, be aware that comparing different types of funds can be like comparing apples and oranges (or lemons) as, for example, a capital fund and a venture fund have very different strategies and risk profiles.

Since TVPI accounts for both your realized and unrealized returns, the metric should generally increase as the fund progresses through its life cycle and does its magic with the portfolio companies and later exits them with a profit.

Key takeaways

• Total Value to Paid In is the sum of DPI (your realized return) and RVPI (your unrealized return), representing your total return.

• It’s a ratio metric that indicates how many times you’ve recouped your investment in both realized and unrealized returns.

• The metric should ideally increase as the fund progresses through its life cycle as it creates value in portfolio companies and later sell them with a profit.

• When the fund is closed, TVPI and DPI should be equal, as all investments are realized at this point.

• Like DPI, TVPI ideally should be above 1 after the fund is closed, indicating a profit on your investment.

• The metric doesn’t consider the duration of your investment.

• If you want to consider the time factor in evaluating fund results, you can’t compare TVPI across funds – unless, to a certain degree, they have similar vintage years – as the figure will vary based on how far along the funds are in their life cycles. If the time factor is not crucial, but you simply want to compare how many times you've recouped your investment, you can compare TVPI across funds. However, be cautious about comparing the metric across different types of funds.

How do you keep an overview of your private equity investments?

It can be challenging to keep track of your total unfunded commitment and the results of investments across different funds, especially because there’s no common standard among private equity funds regarding their calculation and reporting of the fund's costs and results.

This means that as an investor, unfortunately, you can’t simply compare the metrics and return percentages coming from different funds.

At Aleta, we have extensive experience in private equity reporting, and we use our knowledge to provide you with an accurate overview of the funds' returns and your unfunded commitments.

By applying the same method for calculating various private equity metrics across all funds, we enable you to compare the results of the funds. This way, you're better equipped to make informed decisions regarding your private equity investments.

At Aleta, we have extensive experience in private equity reporting, and we use our knowledge to provide you with an accurate overview of the funds' returns and your unfunded commitments.