Everything You Want To Know About Investment Multiples

by knguyenbison

Investors evaluating a private equity fund initially ask for two data points: “What are the fund’s multiple and IRR?” While the two measures tell a more complete story when evaluated together, we are going to focus on the fund’s multiple in this post. Importantly, we are going to talk about a number of different multiples and how they relate to a funds performance.

The CFA Institute’s Global Investment Performance Standards (“GIPS”) standards requires general partners to disclose the following multiples:

Distributed to Paid in Capital (“DPI”) – This can also be called the realization multiple. It measures the amount that has been paid out to investors. It is calculated by dividing cumulative distributions by paid in capital. Investors like this multiple because it tells them how much money they got back. This is better for evaluating a fund later in its life because there are more distributions to measure against.

Residual Value to Paid in Capital (“RVPI”) – Early in a fund, RVPI or the unrealized multiple is more representative of future returns than DPI. The RVPI measures the remaining market value of the fund’s capital which has not yet been realized. It is calculated by dividing the residual value (or fair market value) by paid in capital. Investors need to keep in mind that the residual value is an estimate and is not always accurate.

Total Value to Paid in Multiple (“TVPI”) – The TVPI is the fund’s investment multiple. It measures the total value created by a fund. It can be calculated in two ways: (1) By dividing cumulative distributions + residual value by paid in capital. (2) It can also be found by adding together the DPI and RVPI. This multiple is what is commonly referred to as Net Multiple.  Since the RVPI is incorporated, the TVPI will fluctuate until the fund is fully realized.

Paid in Capital (“PIC”) – The PIC multiple measures how invested the fund is. It is calculated by dividing paid in capital by committed capital. Investors can use this to measure a fund’s investment pace during its investment period. It can also be used to gauge their ability to fully invest their fund.  For many investors, the PIC helps evaluate when a fund is coming back to market. A high PIC means that the fund is near the end of its life and has invested most of committed capital.

Gross vs. Net – GPs often use gross and net multiples interchangeably in conversations and marketing materials so discerning investors should clarify which figures are actually being represented.  Gross multiples represent the fund’s gross returns and do not account for management fees or carried interest. Net multiples are more representative of the actual returns an investor would have received because they include the effects of fees and carry. Net multiples also vary between investors as factors such as side letters, discounts, and exchange rates all impact a specific investor’s net numbers.

An important figure to evaluate in a firm’s performance history is the gap between gross and net multiples. It is generally larger earlier in a fund’s life due to the effects of fees but it should tighten over time usually to somewhere in the vicinity of a 20 basis point spread as more money is put to work. A large spread between the gross and net multiple can mean the GP is not managing the fund efficiently.

Investors must look at several multiples to get a more realistic view of performance. Bison Performance Calculator helps you verify a funds performance metrics including multiples.  Viewed together, you can get a strong indication of past performance for a fund that you can measure against Public Market indices as well as customized peer benchmarks.