December 13, 2018
There are a multitude of ways to evaluate your private equity investments: DPI, TVPI, IRR, TWR, peer sets, the list goes on and on. It can be challenging to understand this alphabet soup of metrics. Luckily, we’re here to help bring clarity to the topic. In this post, we’re going to focus on DPI. Why? Not only is it the first one in our list above, but it is also often overlooked and understated.
What is DPI in Private Equity?
DPI, or distributions to paid in capital, is one type of multiple used to evaluate private equity performance. Multiples help investors analyze fund performance by providing a measure of value relative to investment cost. DPI measures the realized, or cash-on-cash, return on investment. It is calculated as follows:
Use Cases
DPI is used broadly within private markets. For instance, credit, or credit-like strategies place high value on it as early distributions mitigate portfolio j-curves. Investors can use it to evaluate both their underlying investments as well as their entire portfolio. Technology solutions, like Cobalt LP, ease the process of calculating DPI. See below for an example of the output from Cobalt LP:
Source : Cobalt LP. For illustrative purposes only.
Investors can also use DPI for benchmarking. If you are not familiar with benchmarking best practices, check out our Benchmarking White Paper. You can benchmark your individual investments using it to see how one compares to another. You can also benchmark your investments, or broader portfolio, to industry-level metrics. Technology solutions, once again, can help by providing industry-level benchmarks. For example, Cobalt LP allows users to benchmark across various metrics:
Source : Hamilton Lane Data via Cobalt LP.
Drawbacks
While commonly used, DPI does have some drawbacks when used as a sole metric. These drawbacks include:
- It does not account for remaining unrealized value.
- It does not factor in the time value of money.
- There is ambiguity around the accounting treatment of recycling/recallable distributions.
Final Thoughts
When all is said and done, DPI is quite a powerful metric to evaluate a private equity investment. Its simplicity makes it easy to calculate and understand. Its wide usage allows for easy benchmarking and comparisons. Even its drawbacks, once understood, do not detract from the value investors can get from using it.
To learn more about integrating Cobalt LP to benchmark across metrics, click here.
