LP Yield Metrics for Venture Capital
In the intricate world of venture capital, accurate and complete performance measures are an endless challenge. For years, practitioners have relied on IRR and MOIC metrics to claim a fund’s potential, yet these metrics are limited and don’t capture the real performance potential of a fund. As an LP, you want metrics that critique better benchmarks of your investments’ performance in terms of a returns multiple and growth, which is when alternative LP yield metrics come into play and give you a greater understanding of venture capital performance.
The Limitations of Traditional Metrics
Again, IRR and MOIC are indeed widely used but present some limitations. IRR can be a useful metric for measuring annualized returns, but is flawed because it is dependent on the timing of cash flows and does not describe the absolute amount of money made. MOIC, on the other hand, is a simple measure of a multiple of investment returns, but ignores the time value of money. The limitations of both of these metrics prevent LPs from obtaining a complete picture of their investments performance.
Alternative Metrics That Matter
1. Distributed to Paid-In Capital (DPI)
DPI measures the actual cash returned to LPs in relation to their capital commitment. It is a tangible measure of realized returns and liquidity. A high DPI means the fund has exited a large portion of its investments, yielding a lot of cash returns. DPI is handy for measuring fund portfolio maturity and metrics.
2. Residual Value to Paid-In Capital (RVPI)
RVPI represents the unrealized value of a fund’s investments in relation to the capital invested. It allows LPs to see true potential future returns that is unrealized. RVPI will have the highest numeric value early in a fund’s life and decrease as investments are exited. RVPI helps LPs understand the remaining earning potential on their investments.
3. Total Value to Paid-In Capital (TVPI)
TVPI considers the unrealized or unrealized gains together providing you the overall total of fund value to capital invested. TVPI is derived by adding DPI and RVPI together. A high TVPI shows that the total value of the fund is greater than the amount contributed, which is a positive indication of performance.
4. Cash-on-Cash Return (CoC)
CoC focuses on the actual cash income generated relative to the cash invested. CoC doesn’t use the time value of money; thus, it’s the basic number you need to see the annual cash return on investment. It’s an easy metric for you to gauge profitability and investing purposes in income-producing accounts.
5. Gross and Net IRR
It’s important to know the difference between gross IRR and net IRR so LPs can better understand sickness between actual fund performance versus theoretical fund performance. Gross IRR is the IRR using total fund revenue (the fund value before fees and carry), net IRR is net of fees and carry. Understanding the difference between the two is important for LPs to see actual performance.
The Evolve Venture Capital Approach
At Evolve Venture Capital we understand the importance of a multi-dimensional ways of evaluating fund performance using alternative LP yield metrics including DPI, RVPI, TVPI, and CoC which allows our investors to have a holistic and transparent view about their investments. We want to take a data-driven approach which will ensure that LPs will have clarity and understanding to make informed decisions.
We recognize that the traditional metrics above, IRR and MOIC, have their limitations and that is why we have provided a whole variety of other metrics that provide additional information about the performance of our fund. Using these alternative metrics gives us the most effective strategy to align with your expectations, and deliver enhanced returns.
Venture capital investing is not just about the numbers; it is also about the value and potential that exist and to understand how that value and potential customer base translates into actionable investing. Evolve Venture Capital’s focus is to give you the decision making tools and insights to develop an appropriate and successful approach to credible investment opportunities. Join us in a new path to the future of venture capital investing.
