Private Equity IRR vs DPI Where Is the Cash?

Our fictional private equity fund reports a handsome 18.9% annualised return and has handed investors just 20 cents for every dollar contributed. Both numbers can be correct. The fundraising slide is simply having a better day than the bank statement.

IRR, or internal rate of return, expresses performance as a yearly rate using the size and timing of payments. An interim IRR, calculated before a fund finishes, also includes estimated remaining value. DPI, or distributions to paid-in capital, divides total payments received by money contributed.

One fund, two very different messages

Imagine an Asian buyout fund whose investors contribute US$10 million upfront. There are no further contributions or distributions until the end of year four.

Then the fund pays investors US$2 million in cash and reports US$18 million in remaining net asset value, meaning the estimated value still held. Assume these figures already allow for fees and the manager’s share of profits.

Its interim IRR is approximately 18.9% a year. The calculation treats the US$2 million payment plus US$18 million remaining value as US$20 million at year four, against US$10 million paid initially.

Its DPI is 0.2 times, calculated as US$2 million distributed divided by US$10 million contributed. Use money paid in, not the amount merely pledged.

Investors have received one-fifth of their contributions back. They have not received an 18.9% cash payment every year. Most reported value remains inside the fund. A DPI of 1.0 times means distributions equal contributions, not that investors have doubled their money.