Private Equity Performance Measurement Requires Unique Calculations

Private Equity Performance Measurement Requires Unique Calculations
3 min 50 sec

To help institutional investors better understand whether their private equity portfolios are performing well, Callan recently published “The Keys to Unlocking Private Equity Portfolio Assessment,” covering performance measurement and benchmarking for this asset class. In this blog post we focus on how performance for private equity is calculated and how it differs from return calculations for publicly traded securities.


All publicly traded asset classes (i.e., stocks and bonds) and private open-end vehicles (e.g., hedge funds and core real estate) use a time-weighted return calculation (TWR). However, the CFA Institute’s mandated Global Investment Presentation Standards (GIPS) calculation for closed-end private equity vehicles is internal rate of return (IRR):

TWR: An equal-weighted return linking a series of individually calculated returns (e.g., quarterly) to provide a return over any cumulative period. When a new period’s return is produced, it is appended to the existing series. With an equal-weighted return, an investor can have $100 invested in the portfolio one quarter and $1,000 the next, and the TWR will be as if the same amount were invested in each quarter.

The equal-weighted calculation is considered most appropriate for assessing public market managers because the investor controls the dollar-weighting over time by having the freedom to make contributions and redemptions. Therefore, the manager can only be held responsible for the profitability of the return but not the amount of capital to which the return is applied.

IRR: A capital-weighted return that provides a single cumulative figure since inception. IRR is not a series of linked returns. When a new period’s data (additional cash flows and a new ending value) are available, the entire return is recalculated from the inception date.

This dollar-weighted calculation is considered most appropriate for assessing private closed-end fund managers (and their portfolios). After making the initial commitment, the investor does not control when the capital is called or distributed, so the manager is held responsible for both the amount of capital at work and its profitability.

All percentage return calculations can help estimate economic value creation, but each has drawbacks. TWRs provide an indication of either a manager’s or the portfolio’s profitability, but not the actual investor’s profitability, since capital weighting is not applied. IRRs are very sensitive to cash flows early in their calculation period, so large early cash outflows can permanently skew returns in an outsized positive manner. Thus, one can have a high IRR even with an investment providing relatively low profitability. Conversely, as the IRR calculation timeframe extends, the calculation becomes static, varying little even with meaningful cash flow or valuation changes. Unfortunately, one cannot detect these effects by simply looking at the IRR on a standalone basis.

Performance Ratios

The private equity industry also uses a set of three performance ratios to assess returns, comparing interim performance to the amount of capital paid-in to a private equity partnership or portfolio. All of the ratios are dynamic and will change with time.

DPI: Distributions divided by Paid-In capital. This ratio measures relative liquidity by how much has been cumulatively distributed so far. Notionally, a DPI ratio of 0.60x means that 60 cents has been distributed to investors for every dollar contributed.

RVPI: Residual Value (aka Net Asset Value or NAV) divided by Paid-In capital. This ratio measures how much unrealized value remains in the investment. A RVPI ratio of 0.70x means that the remaining investments are valued at 70 cents for every dollar contributed.

TVPI: Total Value (Distributions + Net Asset Value) divided by Paid-In capital. This measures the total gain. A TVPI ratio of 1.30x means the investment has created a total gain of 30 cents for every dollar contributed. TVPI is composed of both returned capital and residual value (e.g., DPI of 0.60x + RVPI of 0.70x = TVPI of 1.30x).

Most private equity managers assert that they are trying to achieve a 2.0x return and an IRR in the mid-teens or higher; however, returns at these levels are less consistent than one might hope. A successful, broadly diversified portfolio that is mature (has a significant number of partnerships both ramping up and liquidating) will generally settle in at a TVPI in the range of 1.60x, which will equate to an IRR in the low-teens.

Callan prefers using TVPI for evaluating partnership performance, given that the key purpose of private equity investing is to secure large dollar gains over time. With TVPIs, the underlying economics of the investment are more evident than with percentage returns. If the TVPI is 1.30x, the 30 cent profitability is understandable (you know how much food it can buy). Percentage calculations are less concrete, which is reflected in a well-worn private equity industry aphorism: “You can’t eat IRR.”

Callan College banner

Posted by

Share on facebook
Share on twitter
Share on linkedin
Related Posts
Private Markets

Sector-Specialist Strategies: What Institutional Investors Need to Know

Chrissy Mehnert
A look at sector-specialist strategies and how institutional investors can analyze them.
Private Markets

Private Equity Sees a Big Slowdown After Frenzy of 2021

Ashley Kahn
An update on private equity performance in 4Q23 and for the year.
Private Markets

Private Equity Investors Focus on Exits as Activity Drops

Alternatives Consulting Group
The Alternatives Consulting Group provides an update on private equity performance in 3Q23.

What Investors Need to Know About the SEC’s 2023 Private Funds Rules

Alternatives Consulting Group
The Alternatives Consulting Group analyzes the new SEC rules on unregistered private funds.
Private Markets

Private Equity Headwinds Slow Liquidity

Alternatives Consulting Group
Gary Robertson provides an update on private equity activity in 2Q23, from fundraising to exits.
Private Markets

Private Equity Starts Adjusting to Tighter Conditions

Alternatives Consulting Group
The Alternatives Consulting Group analyzes private equity activity, from fundraising to exits, in 1Q23.
Private Markets

Private Equity Decelerated in 2022, with the Outlook for 2023 Very Unclear

Alternatives Consulting Group
The Alternatives Consulting Group provides an overview of private equity activity in 4Q22 and for the full year.

Emerging Managers in Private Equity: A Guide for Success

David Smith
David Smith provides a guide for emerging managers that seek to receive institutional allocations for private equity investments.
Private Markets

3Q22 Private Equity Activity Dips but Reflects Pre-Pandemic Levels

Gary Robertson
Gary Robertson analyzes private equity activity through all stages of the investment cycle in 3Q22.
Private Markets

Private Equity Shows Persistence Amid Volatile Markets

Gary Robertson
Gary Robertson provides an analysis of private equity activity in 2Q22, from fundraising to exits to returns.

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.