Investment Performance : DPI

Understanding DPI (Distributed to Paid-In Capital)

When evaluating the success of an investment fund, especially in private equity (PE) and venture capital (VC), DPI (Distributed to Paid-In Capital) is a key metric. It shows how much money investors have received compared to what they invested. DPI measures real cash distributions, making it a reliable indicator of a fund’s performance.

A-Breaking Down DPI

• Formula:

DPI=Cumulative Distributions/Paid-In Capital​

• Cumulative Distributions = The total cash or stock returned to investors.
• Paid-In Capital = The total amount of money investors contributed to the fund.

DPI is always a positive number:

DPI > 1.0 → The fund has returned more cash than investors contributed (Profitable Fund)
DPI = 1.0 → Investors have received back their full investment (Break-even)
DPI < 1.0 → The fund has not yet returned the full investment (Still Unrealized Profits)

• Example: How DPI Works in Real Investments

Assuming ABC Growth Fund is a venture capital fund that raised $100 million from investors (LPs).

  * Over the fund’s 10-year life, the managers invest in several high-growth startups.
  * After 5 years, they sell some of their investments and return $80 million to investors.    

  * At this stage, DPI =$80M/$100M=0.8

This means investors have received 80% of their capital back, but they are still waiting for the remaining returns.

Now, fast forward 3 more years:

-The fund exits its remaining investments and distributes an additional $60 million to LPs.
-The new DPI=$140M$100M=1.4

This means the fund has returned 140% of the original capital, showing clear profits.

B-Comparing DPI to Other Metrics (TVPI & IRR)

DPI is great, but it doesn’t tell the whole story. Here’s how it compares:

• Example:

• If DPI = 1.4 but TVPI = 2.5, it means the fund still holds valuable unrealized investments that could generate even more returns.
• If DPI is high (1.5+) and IRR is strong, the fund has performed exceptionally well with real profits.

C- Why DPI Matters for Investors

• Liquidity Check: DPI tells investors how much cash they’ve received.
• Risk Reduction: The higher the DPI, the less risk remains in the fund.
• Performance Benchmark: DPI is a great way to compare different funds on actual cash returns.
• Final Thought: A high DPI is the best confirmation of a fund’s success. IRR and TVPI are important, but cash in hand is always better than paper gains!