LOS h: Interpret and compare financial performance of private equity funds from the perspective of an investor.

Q1. The relevant measure of cash flows for the limited partners (LPs), and the LPs’ realized return from investment in the private equity fund, respectively, is:

              Return metric                          LPs’ realized return

A)     Gross IRR                        Residual value to paid-in capital

B)     Net IRR                            Distributed to paid-in capital

C)   Paid-in capital                   Net IRR

Q2. An investor in a private equity fund realizes that the residual value to paid-in capital (RVPI) is fairly large relative to the paid-in capital (PIC). The most appropriate conclusion drawn by the investor would be that:

A)   the fund successfully earned profits from its investments.

B)   there were significant cash flows from the fund to the investor.

C)   it will take longer for the investor to realize a return from the fund.

Q3. An analyst is considering the performance of two private equity funds, Delta and Kappa.

The most appropriate conclusion an analyst can draw from the table is that:

A)   Delta has yet to turn a profit.

B)   Kappa has distributed $2.0 for every dollar invested.

C)   Kappa may be a younger fund than Delta.

LOS h: Interpret and compare financial performance of private equity funds from the perspective of an investor. fficeffice" />

Q1. The relevant measure of cash flows for the limited partners (LPs), and the LPs’ realized return from investment in the private equity fund, respectively, is:

              Return metric                          LPs’ realized return

A)     Gross IRR                        Residual value to paid-in capital

B)     Net IRR                            Distributed to paid-in capital

C)   Paid-in capital                   Net IRR

Correct answer is B)

Net IRR measures the cash flows from the fund to the limited partners and is therefore the relevant return metric for the LPs. Distributed to paid-in capital (DPI) measures the LPs’ realized return from investment in the fund. It is calculated as the cumulative distributions already paid to the LPs over the cumulative invested capital.
Gross IRR measures the cash flows from the fund to the portfolio companies. Residual value to paid-in capital (RVPI) measures the LPs’ unrealized return from the fund. Paid-in capital measures the percent of capital used by the general partner.

Q2. An investor in a private equity fund realizes that the residual value to paid-in capital (RVPI) is fairly large relative to the paid-in capital (PIC). The most appropriate conclusion drawn by the investor would be that:

A)   the fund successfully earned profits from its investments.

B)   there were significant cash flows from the fund to the investor.

C)   it will take longer for the investor to realize a return from the fund.

Correct answer is C)

Paid-in capital measures the ratio of capital drawn down as a fraction of total committed capital. Residual value to paid-in capital is the value of the investor’s holding in the fund as a ratio of cumulative invested capital.
A high RVPI to DPI ratio indicates that the fund is having difficulty realizing profits from its investments. In this case it would take longer for the investor to receive distributions from the fund (low cash flows to date).

Q3. An analyst is considering the performance of two private equity funds, Delta and Kappa.

Performance of private equity fund Delta and Kappa
	Delta	Kappa
DPI	2.0	0.0
RVPI	0.0	2.0
TVPI	2.0	2.0

The most appropriate conclusion an analyst can draw from the table is that:

A)   Delta has yet to turn a profit.

B)   Kappa has distributed $2.0 for every dollar invested.

C)   Kappa may be a younger fund than Delta.

Correct answer is C)

Delta’s distributed to paid-in capital (DPI) ratio of 2.0 indicates that investors in the fund realized a profit of $2.0 for every dollar invested and that this profit has already been paid out. Kappa’s multiples indicate that the fund has yet to pay out profits to its investors. The residual value to paid-in capital (RVPI) of 2.0 implies that all returns are still unrealized and will be paid out in future years. One likely explanation for Kappa’s multiples is that the fund is younger than Delta.