How Do You Evaluate Performance in Private Equity?

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).

1. The IRR measures the rate at which the capital invested generates value over time.  

2. The TVPI , on the other hand, TVPI how many euros were generated for each euro called. TVPI
   TVPI (Distributions + Residual value of the portfolio net of carried interest ) / amount called for investments and expenses

3. Finally, the DPI measures the portion of this value that is actually returned to investors in the form of cash.
   DPI = Distributions / Amount called for investments and expenses

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 called down and then invested gradually, and distributions are made over time, as the 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.