What is the Distributions to Paid In Capital Ratio?
The Distributions to Paid In Capital ratio (or DPI) represents the cumulative distributions paid by a private equity fund to its limited partners, relative to the amount the partners have invested. DPI is also sometimes known as the realization multiple.
Alongside internal rate of return (IRR), DPI is a way to measure a private equity fund’s performance over time and relative to other PE funds. To illustrate DPI, we must first discuss how private equity funds work, as well as some definitions necessary to calculate DPI.
The Distributions to Paid In Capital ratio (or DPI) represents the cumulative distributions paid by a PE fund to its limited partners, divided by the amount the partners have invested.
An alternative to DPI is the Total Value to Paid In Capital (TVPI) ratio. TVPI includes the value of unrealized investments, whereas DPI only includes distributions from realized investments.
DPI is easy to use and intuitive to understand, allowing investors to compare metrics across different PE funds.
How Private Equity Funds Work
Private equity funds raise committed capital from investors known as limited partners (LP); this capital commitment is legally binding, so it must be honored by the LPs once the capital is “called.” A private equity firm manages the PE fund, looking for suitable acquisitions and investments.
Once the firm finds an investment candidate, it will issue a capital call. It’s at this point where limited partners will invest the cash to help fund the investment. The PE fund will then acquire and hold the investment, usually for three to 10 years, and then sell or “exit” the business through various strategies. It’s at this point that the PE fund can begin distributing proceeds to the limited partners (less any management fees or carried interest the PE firm may earn).
Calculating the DPI Multiple
Calculating DPI is a relatively easy and straightforward calculation. It is calculated by taking the total cumulative distributions paid to limited partners divided by the total amount of capital the LPs have invested (the called capital). The mathematical formula is given below:
DPI = Cumulative Distributions ÷ Paid In Capital
Example DPI Calculation
Assuming the following fact pattern, we can easily calculate DPI:
Called capital (paid in capital): $75 million
Cumulative distributions: $130 million
DPI = $130 million ÷ $75 million = 1.7x
Note the above example uses net distributions to limited partners, which is the industry standard. Therefore, we have assumed the cumulative distributions are net of the PE firm’s management fees and carried interest.
The TVPI Multiple
An alternative to DPI is the Total Value to Paid In Capital (TVPI) ratio. The difference between the two formulas lies in the numerator. Whereas the DPI multiple only uses actual, realized distributions paid to LPs, the TVPI ratio includes cumulative distributions plus the unrealized value of any investments that have yet to be exited and distributed. This remaining value is often called the residual value.
The residual value is the value of any investments that have yet to be exited, so there are no proceeds to be distributed. Residual value can be thought of as the unrealized portion of a private equity fund’s investments. Of course, at the end of the fund’s life there will be no more residual value since all investments would have been liquidated and distributed.
Similar to DPI and TVPI, a Residual Value to Paid In Capital (RVPI) can be calculated. In this case the only term in the numerator is the residual value while the denominator will remain the paid in capital.
DPI vs. TVPI Multiple: What is the Difference?
The DPI multiple is calculated using total cumulative distributions, while the TVPI multiple includes both cumulative distributions and the residual value of unrealized fund assets.
While the total value is nice to know, the timing and amounts of future unrealized profits is unknown, so the TVPI multiple is inherently more theoretical compared to DPI. Since DPI only includes actual distributions to limited partners, it’s a more certain measure of a private equity fund’s actual performance.
How to Calculate DPI and TVPI
Assuming a similar fact pattern as earlier, but including residual value, we can calculate DPI and TVPI:
Called capital: $75 million
Cumulative distributions: $130 million
Residual value: $60 million
DPI = $130 million ÷ $75 million = 1.7x
TVPI = ($130 million + $60 million) ÷ $75 million = 2.5x
Similar to our earlier example, the distributions and residual value are net of the PE firm’s management fees and carried interest.
Advantages of DPI
Some of the advantages to using DPI to analyze private equity returns include:
It’s a relatively quick and easy-to-use calculation.
DPI is intuitive to understand: it’s effectively the ratio of cash from an investment relative to the cash made into the investment.
Given the straightforward nature of the calculation, DPI can be used to benchmark and compare returns across funds.
Since DPI uses realized distributions, it avoids the pitfalls of using future unrealized profits, which may or may not come to fruition.
DPI does not consider the unrealized value of investments, which could dramatically understate the fund’s actual performance.
What is a Good DPI Multiple?
As with any multiple, DPI should be compared along with other metrics to better evaluate a private equity fund’s performance.
Of course, investors will always want a multiple of greater than 1. This means that the cumulative distributions to investors are greater than the paid in capital. However, to account for the limited partners’ opportunity costs, a good DPI should be well above 1.
If DPI is equal to 1, then investors are not receiving value relative to the amounts invested. Additionally, there is probably value erosion since DPI does not take into account the time value of money. For example, if a limited partner invests $10 million dollars in year 0 and the fund distributes $10 million in year 3, the DPI is 1, but the actual value has eroded since the investment did not even increase to account for the investor’s opportunity cost.
A DPI less than 1 is a red flag since the fund wasn’t successful enough to even return the invested capital.
Having said that, DPI will likely be zero (or low) during the first few years of a fund’s life since it’s unlikely the fund has exited (liquidated) any investments or acquisitions. Therefore, the DPI won’t be meaningful until exits start to happen.
Similarity to Cash-on-Cash Return
DPI is somewhat similar in concept to a cash-on-cash return (also known as multiple of invested capital or MOIC). However, the cash-on-cash return is calculated on individual investments (in conjunction with the IRR). DPI is based on the total fund’s distributions, which are made up of many different investments.
Additionally, cash-on-cash is typically calculated before accounting for private equity management fees or carried interest. In other words, it is a “gross” metric (gross meaning before fees and PE profits). DPI, on the other hand, is usually calculated on a “net” basis, meaning after fees and PE profits.
We cover cash-on-cash returns in more detail in our LBO Modeling course.
Thank you for reading this CFI guide to Distributions to Paid In Capital. To continue learning and progressing in your career, these additional CFI resources will be helpful:
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