For years, IRR (Internal Rate of Return) has been the star metric in private market circles. But in today’s market, investors are starting to ask a different question: “How much cash have I actually gotten back?” That’s where DPI (Distributions to Paid-In Capital) in private market funds steps in as the real measure of performance.
As Tristan Tully, Head of European Private Equity at Brookfield, put it during a panel: “DPI is the new IRR.”
In this piece, we’ll break down what DPI is and why it is increasingly overtaking IRR as the preferred performance metric.
What is DPI in Private Markets
In private markets, DPI (Distributions to Paid-In Capital) is a straightforward but powerful metric that indicates the actual cash returned to investors in relation to the money they have invested. It’s expressed as a ratio or multiple, offering a clear “cash-on-cash” picture.
A DPI above 1.0 means investors have received more cash back than they put in. A DPI below 1.0 signals that capital is still tied up in investments. The formula to calculate DPI is: DPI = Distributed Capital / Paid-In Capital.
Both DPI and IRR measure investment performance. Unlike the internal rate of return (IRR), which accounts for the speed of returns by factoring in the time it takes for LPs to receive distributions, time is not a factor when calculating DPI.
As Howard Marks put it in his memo You Can’t Eat IRR, “A high internal rate of return does not in and of itself put money in one’s pocket. Only when it’s applied to a material amount of invested capital for a significant period of time.”
Unlike performance measures that highlight potential upside, DPI focuses solely on realized outcomes—the money already distributed back to Limited Partners (LPs).
DPI is used across a wide range of private market funds, each with distinct strategies and return profiles:
- Venture Capital funds back startups with high growth potential, where DPI often materializes through IPOs or acquisitions.
- Private Equity Funds buy into businesses with stable cash flows and long-term potential.
- Buyout funds acquire and improve mature businesses, distributing gains when those companies are sold.
- Real Estate funds generate DPI via property sales or steady rental income distributions.
- Private Credit funds provide loans directly to businesses, producing returns through interest and principal repayments.
- Infrastructure funds invest in essential assets such as energy, transport, and telecom, with distributions often tied to long-term cash flows.
Unlike IRR, DPI is purely about realized returns. Other related metrics help complete the picture:
- IRR (Internal Rate of Return) accounts for the timing and speed of distributions.
- TVPI (Total Value to Paid-In) combines distributed capital with remaining NAV.
- RVPI (Residual Value to Paid-In) shows what’s still locked in unrealized holdings.
- MOIC (Multiple on Invested Capital) reflects gross returns, while DPI is net after fees and expenses.
Why Investors Now Prioritize DPI Over IRR
As markets shift, LPs are no longer satisfied with paper gains or theoretical projections. They’re demanding real, realized returns, and DPI is now front and center in performance conversations.
While IRR still offers insight into the time efficiency of capital, investors have grown wary of metrics that can mask liquidity issues. Here’s why DPI has moved ahead of IRR as the go-to measure of private markets success:
Focus on Realized Returns
DPI cuts through inflated valuations by showing what’s been returned in cash rather than projections.
Liquidity Needs
Pension funds, endowments, and family offices need cash distributions to meet obligations, not just paper profits.
Market Conditions
Fewer IPOs and tougher M&A markets delay exits, making liquidity harder to achieve.
Reality Check
IRR can mask poor liquidity outcomes, while DPI forces accountability.
Investor Alignment
Limited partners ultimately want spendable, reinvestable capital, which DPI directly measures.
Comparability
DPI enables more accurate benchmarking across different funds and strategies.
Curious how to boost DPI outcomes? Schedule a call with our expert and discover how we can help in returning capital faster.
How DPI Shapes Fund Performance Evaluation
DPI has become a transparent benchmark for judging fund managers. LPs want to see cash returned, not just unrealized marks. Family offices and angels increasingly prioritize DPI as a measure of liquidity. Fund managers use strong DPI to prove their track record and raise successor funds. LPs rely on DPI for recycling capital into new funds and compounding returns.
How DPI Facilitates Recycling
- Measuring realized returns provides concrete evidence of distributions.
- Creating liquidity through high DPI signals successful exits and cash on hand.
- Reinvesting in new funds allows LPs to channel distributions into fresh opportunities.
- Strategic recycling by GPs lets managers reinvest in portfolio companies for growth.
- Long-term value creation emerges as this recycling accelerates compounding returns.
The Role of SPVs in Boosting DPI Outcomes
Special purpose vehicles (SPVs) have emerged as a practical way for both fund managers and LPs to unlock liquidity. By creating targeted investment structures, SPVs provide clearer risk profiles, facilitate faster exits, and ultimately improve DPI outcomes. They’ve become particularly relevant in a market where exits are more complex to achieve, but investors still need distributions.
Faster Exits
Secondary SPVs allow investors to realize returns earlier, improving DPI.
Clearer Risk/Return Profiles
Isolating assets in SPVs helps investors assess risk and reward more precisely.
Attracting Investment
Investors often prefer dedicated SPV structures, making fundraising easier.
Enhanced Credibility
Trackable performance of SPVs improves trust between managers and LPs.
Securitization Benefits
SPVs can convert illiquid assets into tradable securities, resulting in the faster realization of returns.
Strategic Diversification
SPVs enable targeted investment strategies, thereby reducing overall portfolio risk and potentially enhancing outcomes.
SPVs have become a strategic tool to unlock liquidity for LPs while giving GPs the flexibility to manage exits more creatively.
The Future of DPI in Private Market Performance Metrics
As valuations stay high and exits remain limited, DPI is gaining traction as the “premier metric” of private market investing.
Why DPI Is Gaining Importance
- Focus on Liquidity: In today’s environment, with high paper valuations but fewer exit opportunities, DPI’s focus on realized cash returns is more crucial than ever.
- Tangible Value Creation: DPI offers concrete proof of a fund’s success, moving beyond unrealized gains to show actual value delivered.
- Manager Effectiveness: A rising DPI signals a manager’s ability to successfully exit and distribute capital, fundamental to private market strategies.
The Role of DPI in the Future
- DPI is expected to remain the leading measure of realized success.
- It will continue to be balanced with other metrics, such as TVPI and RVPI, for context.
- By offering clarity amidst uncertainty, DPI provides LPs with confidence during complex cycles.
Final Thoughts
In private markets today, DPI has taken center stage. While IRR still has value, investors are increasingly focused on the tangible cash that flows back to them. Whether through successful fund exits, smart recycling, or innovative SPV structures, DPI is the metric that defines real performance.
Ready to show investors more than paper gains? Book a call with us or get in touch with us at info@auptimate.com, and one of our experts will help you streamline exits, boost your DPI, and strengthen your track record.
