How we assess fund investments: Total Value to Paid In Capital

BFP #OpenLP Series (1) –  Total-Value-to-Paid-In capital (TVPI), or the investment multiple, is calculated by dividing the fund’s cumulative distributions plus its residual value by the amount of paid-in capital (as opposed to committed capital).

Global Investment Performance Standards (GIPS) require VC and PE firms to publish this ratio to make the relative performance between various funds more transparent.

How is Total Value to Paid In useful? What are the drawbacks?

The metric can be useful as it gives potential investors a good high-level benchmark to assess how a fund is tracking. It shows how investors’ money at risk is valued by the market (assuming only externally priced valuations are used).

However, there are a few drawbacks of this metric: Since funds invest capital over time, generally not all paid in capital is invested at the time the metric is calculated. There might be a timing delay and funds deduct management fees from paid in capital. Also, TVPI does not take into account time value of money. Nor is it a cash-based metric as many gains (or losses) may be on paper only.

Therefore, Total-Value-to-Paid-In Capital (TVPI) becomes a more useful figure at the later stage of a funds’ cycle, when its underlying investments mature.

BFP’s take

At BFP we look at TVPI mostly in the context of assessing track record based on more mature fund generations. We believe that it is a less a useful metric for benchmarking younger fund vintages.

For instance, some companies may perform well, even be “cash positive”, but not have this reflected in the TVPI as the company has not had an up-round. Conversely, a company may be totally hyped at the early stage of its life. It may have received a higher valuation quickly in a follow-on financing round, without having materially de-risked.

Therefore, in evaluating the prospects of younger fund vintages, we look directly at how the underlying companies’ KPIs are developing. We like to see several companies that conceivably have the potential to repay the fund based on those KPIs. It is helpful if these potential winners are highlighted in a fund pitch deck.

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