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Professional investors generally rely on three complementary metrics: the internal rate of return (IRR), the total value to invested capital (TVPI), and the dividend payout ratio (DPI).
- The IRR the rate at which invested capital generates value over time.
- The TVPI , for its part, TVPI how many euros were generated for every euro invested.
- Finally, the DPI measures the portion of this value that is actually returned to investors in the form of cash.
Taken on its own, none of these indicators is sufficient to assess a fund’s quality. Together, they make it possible to evaluate value creation, its realization over time, and the distributions actually received by investors.
Data collected by leading specialized organizations show that the top global private equity funds have historically generated exceptionally high returns. Over the past twenty years, funds in the top quartile have posted internal rates of return exceeding 20% after fees, with average multiples of around 2.3 times the capital invested.
However, this performance comes at a cost: illiquidity. Private equity is characterized by a long-term investment horizon, often exceeding ten years. Capital is invested gradually, and distributions are made over time, as the fund managers complete divestitures of companies.
The other major challenge lies in fund selection. The performance gaps between the best and worst fund managers can be substantial. While first-quartile funds have historically created significant value for their investors, the worst-performing funds have at times destroyed capital.
In this environment, access to the best fund managers, diversification, and the alignment of interests between investors and management teams remain essential factors in building a sustainable and successful private equity strategy.
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