A Hidden Gem in PE Performance Evaluation: TVPI by Deal Year

TVPI by Deal Year vs Fund Level TVPI

I am reviewing a recent Insight published by Preqin (link) that uses #TVPI (see below for 'What's TVPI?') by Deal Year for evaluating #PrivateEquity performance (graph reproduced below). I am pleased to see that Preqin is finally using a metric that I consider a much better gauge of PE performance as compared to Fund Level TVPI. In my conversations with over 100 GPs while I was managing a CA$ 1 billion private market funds portfolio at a #publicpensionfund, I found that using Fund Level TVPI was fraught with challenges. As an #LP, my primary concerns were related to discrete nature of Fund Level TVPIs (not being available for all the years) and inconsistent definition of the #vintage itself. This not only rendered the whole comparison and benchmarking exercise less effective but also created gaps in fund performance for the non-vintage years making it difficult to evaluate it against a specific economic environment. 

I welcome use of TVPI by Deal Year metric by #Preqin, though, I would not use it to conduct an inter-temporal analysis as done in Fig. 1 above. Comparing average TVPI as of today for deals done in different years in the past, as shown in the above graph, only provides a sense of evolution of average TVPI with time in different geographies. Lower levels of average TVPI for recent deal years could be simply because those deals have not yet reached their maturity and are still far from their exit phase. Comparing different funds or even geographies based on TVPI of the deals made in the same year provides a good sense of their relative performance as depicted in Chart 1 below (reproduced from a discussion paper on PE performance that I had previously published).

Source: Preqin, Fund manager performance track record

What is TVPI?

Total Value to Paid-in-Capital (TVPI) is a standard measure to evaluate performance of a private market fund. It is a multiple type of measure and indicates ratio of sum of the value of remaining invested capital and any capital returned by the fund to the capital paid into the private market fund. Mathematically,

TVPI can be computed at a gross level or net of fees. It is a cash-on-cash return measure comparing cash outflow (potential + realized) with cash inflow without regards to timing of those cashflows. The simplicity of TVPI computation when looked in conjunction with a typical PE Buyout fund’s life of 12 years makes it a very effective and easy to comprehend measure of fund performance evaluation.

Further, TVPI can also be computed over a subset of fund deals. For example, gross TVPI for all the deals done by a fund in a particular year. This can yield a very useful metric: TVPI by Deal Year. Below is a graph of net TVPI of a typical PE Buyout fund.

The simplicity of TVPI also results in a limitation for TVPI. It ignores the fundamental concept of finance, i.e. time value of money, as it does not take into account timing of the cashflows. Hence, it is recommended to also consider fund IRR for a more complete view of the fund's performance.

What are the other measures of private market fund performance?

Without getting into too many details on each of the measures, #privatemarkets performance measures can be broadly categorized into three categories:

Multiple Based: Compares different streams of potential and realized cash outflows with inflows. Example: TVPI, DPI, RVPI, Loss Ratio, Capital Impaired Ratio, Deal MOIC distribution - these last 3 being very important to evaluate #coinvestments

Cash Flow Timing Based: Considers timing of cashflows and may include a public market benchmark in computations. Example: IRR, PME and its variations

Attribution Based: Attempts to understand value creation drivers for a private market fund. It typically involves attributing total value generated to each of the drivers. Example, for a PE fund the value creation drivers would be: Leverage, multiple expansion, EBITDA growth (organic vs inorganic) and combination