The most common measure of performance within the private equity industry is the Internal Rate of Return (“IRR”). Such performance can be calculated both prior to deduction of fees, expenses and carried interest (gross) and after such deductions (net).
Additional frequently used measures of net performance are the multiples to investors of:
- Distributions to paid-in capital (DPI);
- Residual value to paid-in capital (RVPI);
- Total value to paid-in capital (TVPI).
AlphaLAW recommends the IRR and the multiples mentioned above as being the most appropriate and commonly used performance indicators.
Where General Partner (GP) capital which does not pay carried interest or fees is a small percentage of the fund, it can be included in the net performance calculations, but where it is a significant percentage, it should be excluded and the resulting net performance figures footnoted to make it clear that GP capital has been excluded from the calculations.