Distributions to paid-in-capital (“DPI”) is one of the headline metrics used to assess private equity fund performance. DPI represents the cash experience of a private fund investor, i.e., a limited partner (“LP”), by measuring realized returns relative to invested capital. While LPs appreciate and have grown to favor DPI for its conceptual clarity and simplicity, DPI alone can present an incomplete picture of a private fund’s performance and cause unintended incentives for fund sponsors. For instance:
DPI fails to capture the time value of money;
DPI fails to reflect the value of unrealized investments;
A narrow focus on DPI places pressure on fund sponsors to prioritize short-term realizations over long-term value creation.
This article outlines the benefits of DPI, highlights how it can be distorted or nuanced, and explains why it should be evaluated in context with other performance metrics.
Why DPI?
DPI represents cumulative distributions over paid-in capital. Simply put, a DPI of 1.5x means an investor has received $150 back on a $100 investment. This metric offers several clear advantages to both LPs and fund sponsors. First, in the private equity space where valuation is inherently complex and subjective, DPI stands out for its transparency and simplicity. Because it only captures actual cash returned, DPI is arguably the most intuitive measure of fund performance from an LP’s perspective. It reflects what ultimately matters to LPs: distributions. And LPs often use DPI to benchmark performance across funds of similar strategy and vintage.
For fund sponsors, a strong DPI can serve as a compelling and easily understood signal of successful track records when communicating with current LPs or raising a successor fund to prospective LPs. Unlike Total Value to Paid-In Capital (“TVPI”), which measures the overall performance of the fund encompassing both realized and unrealized value, or Multiple on Invested Capital (“MOIC”), which measures the total value of an investment relative to the amount of capital actually invested into portfolio companies, DPI does not need to depend on valuation assumptions for unrealized portfolio investments, which can invite scrutiny given the inherent difficulty and concerns surrounding valuation and the illiquid nature of private equity assets.
Second, DPI also avoids time-weighted distortions present in Internal Rate of Return (“IRR”). IRR is a metric that measures the annualized rate of return an investment generates, accounting for the timing of all cash flows, including capital contributions and distributions. This metric can be distorted by fund finance techniques that a sponsor may utilize. For example, the growing use of subscription facilities allows fund sponsors to delay capital calls, artificially inflating IRR without changing the underlying economics while incurring additional expenses associated with financing. DPI is immune to such inflationary effect[1] because it focuses strictly on cash flows, not timing.
Finally, a focus on DPI can help align interests between LPs and fund sponsors. By emphasizing distributions, DPI encourages funds to seek exit opportunities rather than holding assets, which is especially relevant for LPs whose management fee is calculated based on invested capital. As distributions reduce invested capital, management fees decline accordingly. As such, DPI can reinforce seeking exit opportunities and promote greater capital efficiency for the benefit of LPs.
However, while DPI offers certain clear benefits, it reflects only one side of fund performance and is therefore not without limitations. Its simplicity is a strength but also a limitation that raises questions about how it should be interpreted.
Pitfalls of DPI
What makes DPI compelling can also makes it misleading. While DPI avoids the complexities of valuation assumptions required for TVPI or MOIC, this simplicity comes at a cost: DPI does not account for unrealized value of portfolio investments, a potentially significant component of a fund’s overall performance, depending on its strategy, size, or stage in its lifecycle. For example, a private equity fund may hold a substantial portion of its value in unrealized investments, especially if it focuses on longer-term investment horizons (e.g., venture capital funds or certain funds-of-funds structures). DPI may be more useful for assessing funds with numerous portfolio investments, where it can demonstrate the fund sponsor’s ability to execute transactions and generate exits. In contrast, DPI for a smaller fund may be disproportionately impacted by the outcome of a single investment, whether favorable or not.
In some instances, an overemphasis on DPI may discourage fund sponsors from delaying realizations for more optimal timing or from recycling distributable proceeds to support portfolio companies through follow-on investments or make new portfolio investments – strategies that may enhance overall performance but are not reflected in the DPI metric. For this reason, in order to artificially boost DPI, a fund sponsor may seek premature exits or other liquidity strategies like dividend recapitalization or NAV financing, potentially at the expense of long-term value creation.
DPI also fails to reflect unrealized losses. For example, a private equity fund that exits one successful investment early in its life might show a DPI of 0.8 at year 3, which may appear impressive. But if several other portfolio investments have been written down or written off, those unrealized losses would not be captured in DPI at year 3, thereby overstating the health of the overall portfolio.
Moreover, DPI’s exclusion of timing and speed of return from the equation can also distort performance. For example, a DPI of 0.8x at year 8 is not equivalent to a DPI of 0.8x at year 10, yet DPI treats them as equal. Without accounting for when distributions occur, DPI overlooks the cost of delayed returns and opportunity cost. Relatedly, while conventional wisdom favors earlier distributions, some LPs may expect longer investment horizons when making a private fund investment or have limited opportunities to redeploy capital promptly, thereby exposing them to reinvestment risk when capital is returned too early.
Finally, although DPI appears mechanically straightforward, LPs should examine how and which fund expenses are netted in its calculation. For example, management fees are often reduced for certain LPs (including LPs that are affiliated with the fund sponsor) through side letters. If DPI is reported net of the most favorable fee terms, rather than those applicable to the majority of LPs, the resulting figure will not accurately reflect the actual cash flow experience of most LPs.
Conclusion
While DPI is a useful and straightforward indicator of realized performance, and may motivate fund sponsors to prioritize exits, it is neither a catch-all metric nor sufficient on its own. It is often best used alongside other metrics that account for different data and assumptions to illuminate a more comprehensive view of a fund’s performance. Ultimately, as DPI continues to gain broader adoption, both LPs and fund sponsors stand to benefit from its transparent application, building trust and better alignment of long-term interests.
[1] However, certain other fund finance practices, such as NAV financing or dividend recapitalization, can inflate both IRR and DPI.
