Venture Capital Jobs & Tips To Break Into VC - 07

How Do Limited Partners Evaluate VC Fund Performance?

Jan 11, 2024

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Today At A Glance:

Deep Dive: How Do LPs Evaluate VC Fund Performance?
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TODAY’S DEEP DIVE

HOW DO LPs EVALUATE VC FUND PERFORMANCE?

Till now you have been reading articles on how the investors (VCs / Angel Investors) evaluate the startups and make the investment decision. But today’s article is on how the LPs (HNIs, Pension Funds or endorsement funds) evaluate the performance of any venture capital fund & make the decision to invest in that.

So grab your coffee and let’s deep dive into it!

There are generally three terms that LPs use to evaluate the performance of a VC fund:

Distribution Paid In Capital (DPI)
Residual Value Paid In Capital (RVPI)
Total Value Paid In Capital (TVPI)

Total Value Paid In Capital (TVPI) = (D+RV) / Paid In Capital(PIC)
Paid in Capital: It is a contributed capital or drawn capital.

Source: Google Images

Let’s take an example and try to understand each term:

Suppose Limited Partners (LP) committed to invest around $5M in a VC fund and General Partners (GP/VC) ask for an amount of $4M for 3 years out of $5M. So here Paid in Capital (PIC) = $4M.

[ Remember: the Paid In Capital is different from the Committed Capital. The Committed capital is the amount of money that an investor agrees to contribute to the investment fund. here Committed capital is $5M and Paid Capital is $4M (previously mentioned). ]

So what’s the Distribution Paid in Capital (DPI) and Residual Value Paid in Capital (RVPI) in this example?

Distribution Paid In Capital (DPI): It is the amount of money that the VC fund has returned to the Limited Partners, which is low in the early year and increases over the period.
Residual Value Paid In Capital (RVPI): It is the amount of money that remains after the distribution or is returned to the Limited Partners.
Ex - Suppose VC Fund has decided to invest in 20 startups and out of that, VC funds have exited from 5 startups and that money is returned to the investors and now the remaining investment is 15 startups. So if the 15 investment value is $150M and cash is around $10M. So the Residual Value of the Fund is $150M + $10M = $160M.
Total Value Paid In Capital (TVPI) = DPI + RVPI

Now, let’s understand all terms with one example of a VC fund

Ex: Fund’s Paid In Capital (PIC) = $70M

Distribution Capital (D) = $80M and Residual Capital (R) = $100M (Hope you are getting the idea of what these terms are from the above explanation)

Calculation:

Distribution Paid In Capital (DPI) = D / PIC = 80 / 70 = 1.1420X
Residual Value Paid In Capital (RVPI) = R / PIC = 100 / 70 = 1.428X
Total Value Paid In Capital (TVPI) = DPI + RVPI = 1.1420 + 1.4280 = 2.57X

Explanation:

DPI = 1.1420X i.e. Fund has returned to LPs all paid-in capital i.e. $70M and received 14.28 above that original amount paid.
RVPI = Still a lot of value of funds left behind, which will return to LPs in the coming time.
TVPI = Total value of fund utilized.

This means the fund is able to generate more return over the original amount i.e. paid-in capital. You can try out this example to calculate in Excel.

That’s it. I hope it will help you to understand how the limited partners evaluate the venture capital fund performance.

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✍️Written By Sahil | Join VC Crafter Community

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