PE Fund Performance Metrics: IRR, MOIC, TVPI, DPI, and the Gross-to-Net Gap
9 min read
- Gross MOIC and gross IRR measure deal-level returns before fees. Net IRR is what LPs actually earn. The gap is typically 5-7% for mid-market and upper-mid-market buyout funds.
- TVPI includes unrealized gains (paper marks). DPI counts only cash returned to LPs. DPI is the only metric that cannot be manipulated.
- The 2-and-20 fee structure (2% management fee, 20% carry above a hurdle rate) is the industry standard but the economics are more complex than the headline suggests.
- A fund's DPI only becomes meaningful after Year 5. Before that, low DPI is expected. After Year 8, low DPI is a warning sign.
The Four Metrics and What Each One Measures
| Metric | Formula | What It Tells You | Limitation |
|---|---|---|---|
| Gross MOIC | Total Value / Invested Capital | How much value the fund created per pound invested, before fees | Ignores time. A 2.0x over 3 years is very different from 2.0x over 7 years. |
| Gross IRR | Annualised return (before fees) | Time-adjusted return on invested capital | Can be inflated by early exits. A quick 1.5x in 12 months shows a high IRR but low absolute profit. |
| TVPI | (Distributions + Unrealised Value) / Paid-In Capital | Total value created relative to capital called, including paper gains | Unrealised values are estimates. The GP controls the valuation methodology. |
| DPI | Distributions / Paid-In Capital | Cash actually returned to LPs | Meaningless early in fund life. Only useful after Year 5+. |
Gross vs Net: Where the Returns Go
The difference between gross and net returns is where candidates demonstrate they understand fund economics, not just deal mechanics.
Gross returns are calculated at the deal level: entry equity, exit equity, holding period. This is what the deal team focuses on.
Net returns are what LPs receive after:
- Management fees: Typically 2% of committed capital during the investment period (Years 1-5), declining to 1.0-1.5% of invested capital thereafter. On a £1B fund, this is £20M per year in the early years, regardless of performance.
- Carried interest: 20% of profits above the hurdle rate (typically 8% preferred return). The GP only receives carry after LPs have received their capital back plus the hurdle return.
- Fund expenses: Legal, accounting, administration, broken deal costs. Typically 0.5-1% of committed capital over the fund's life.
The Fee Structure: 2-and-20 in Practice
The "2-and-20" headline (2% management fee, 20% carry) understates the complexity.
Management fees
Charged on committed capital during the investment period, not invested capital. A £500M fund charges £10M per year even if only £200M has been deployed. After the investment period ends (typically Year 5-6), the fee basis switches to invested capital at cost (a lower number) and the rate often drops to 1.0-1.5%.
Management fees are allocated to individual portfolio companies on a time-weighted basis proportional to each company's share of the total cost basis. This matters because it affects the "called capital" for each deal, which is the denominator in company-level return calculations.
Carried interest
The GP receives 20% of profits, but only after LPs have received:
- Return of their invested capital
- A preferred return (hurdle rate) on that capital, typically 8% annualised
- A GP "catch-up" that allocates subsequent profits to the GP until they have received their full 20% share
Two waterfall structures exist:
| Structure | How Carry Is Calculated | LP Implication |
|---|---|---|
| European (whole-fund) | Carry calculated on total fund performance. GP receives carry only after all capital + hurdle is returned across the entire fund. | Safer for LPs. GP cannot take carry on early winners if later deals lose money. |
| American (deal-by-deal) | Carry calculated per deal. GP receives carry on each profitable exit individually. | Riskier for LPs. GP can take carry on profitable deals even if the overall fund underperforms. Clawback provisions partially mitigate this. |
How to Interpret Fund Performance
A fund reporting 1.9x Gross MOIC, 21% Gross IRR, 1.5x TVPI, 15% Net IRR, 0.2x DPI. Is this good?
The answer depends entirely on context:
- Fund age: In Year 4 of a 10-year fund, 0.2x DPI is normal (few exits yet). In Year 8, 0.2x DPI is alarming.
- Strategy: A growth equity fund targeting 3.0x+ MOIC would view 1.9x as mediocre. A large-cap buyout fund targeting 1.8-2.2x would view it as solid.
- Gross-to-net gap: 21% gross to 15% net (6% gap) is typical for upper-mid-market. A 10%+ gap suggests excessive fees or a small fund where fixed costs eat a larger share of returns.
- TVPI vs DPI gap: TVPI of 1.5x with DPI of 0.2x means 87% of the reported value is unrealised. The question is whether the unrealised marks are defensible.
IRR vs MOIC: When They Diverge
IRR and MOIC usually move together, but they can diverge in ways that reveal the fund's strategy:
| Scenario | MOIC | IRR | What It Means |
|---|---|---|---|
| Quick flip (sold in 18 months) | 1.5x (modest) | 35%+ (high) | Short hold period inflates IRR. Absolute profit is small. |
| Long hold, strong returns | 3.0x (strong) | 18% (moderate) | Excellent absolute return, but took 7 years. IRR is diluted by time. |
| Dividend recapitalisation | 1.0x early | Very high | GP returns capital early via a leveraged dividend. IRR spikes but no new value was created. |
This is why sophisticated LPs look at MOIC and IRR together, never in isolation. A fund that reports high IRR but modest MOIC is likely recycling capital quickly without generating large absolute returns.
Interview Questions
"What is the difference between gross and net IRR?"
Gross IRR is the annualised return on invested capital before management fees and carried interest. Net IRR is what LPs actually receive after deducting the 2% management fee, 20% carried interest above the hurdle rate, and fund expenses. The gap is typically 5-7% for mid-market buyout funds.
"What is the difference between TVPI and DPI?"
TVPI includes both realised distributions and unrealised portfolio company valuations. DPI counts only cash actually returned to LPs. TVPI is useful for evaluating younger funds where most companies are still held. DPI is the definitive measure for mature funds because it reflects actual cash, not estimates.
"A fund has a 2.5x MOIC but a 12% IRR. Is that good?"
The MOIC is strong but the IRR suggests a long hold period (2.5x over ~7 years produces roughly 12-14% IRR). Whether this is "good" depends on the strategy. For a large-cap buyout fund, 2.5x MOIC is excellent regardless of IRR. For a growth equity fund expecting faster deployment cycles, the extended hold period may indicate execution issues.
"How does carried interest work?"
The GP receives 20% of profits above the hurdle rate (typically 8% preferred return). LPs receive their capital back plus the hurdle return first. Then the GP catches up to their 20% share, and remaining profits are split 80/20. In a European waterfall, this is calculated on the whole fund. In an American waterfall, it is calculated deal by deal, with clawback provisions if the fund underperforms overall.
Take Your Preparation Further
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