It is great that more people wake up to the fact that ‘you cant eat IRR’. It is much better to look at a simple cash measure like multiple. However it is important to remember two simple things:
- DPI is amount distributed over invested. Is a 0.8 DPI good? Well, if the fund is 4 years old, it is probably excellent. If it is 8 years old probably not, unless it has a lot of great unexited investments. Bottom line: DPI is useless since that, unless it is above 2x, I really cannot say if the fund is doing well or not. For a performance measure, it is quite a bummer.
- Let’s forget DPI and move to TVPI, which does not have the above issue. A TVPI of 1.5 is what the US equity market has returned over any four years period, and so is just ok, below 1.5 does not look good, above 1.8x it is good. But TVPI has two big problems. GP sets the NAV and can thus have any TVPI it wants. I guess that’s why people like DPI – NAV does not come in. But very importantly and often neglected is the fact that multiples like DPI and TVPI can be manipulated too, just like IRR.
Manipulation of multiples 101: Have a recycling close, net out cash flows and you multiple will magically improve.
Example:
- You invest 100, exit 150 year 4, invest 100 that same year, and exit for 200 year 10. TVPI is 350/200 = 1.75x. Fine
- Net out these cash flows and tell investors you invested 100, distributed 50 in year 4 and then 200 in year 10. Now you DPI is 250/100 = 2.5x. Now you are a superstar!!
- You do not like the net out / cant easily do it, have a recycling close, will do the same thing.
So, like IRR, you can juice your DPI. Maybe not as ridiculously as an IRR, but pretty good. And like with IRR, there is a cheating inequality. It is mostly the large LBO funds that have recycling clauses, and can juice up their DPI….
