BFP #OpenLP Series — How we assess fund investments: (2) MoIC & DPI

What are MoIC and DPI?

Multiple on Invested Capital (MoIC) is calculated by dividing the fund’s cumulative realized and unrealized value by the total dollar amount of capital invested by the fund.

Distribution to Paid-In Capital (DPI) is a measure of the cumulative investment returned to the investor relative to paid in capital.

The two metrics have in common that they look at the performance of the underlying assets in a fund, whereby the second one focusses specifically on realized gains.

How are MoIC and DPI useful? What are their drawbacks?

MoiC and DPI are important metrics to compare performance between funds, but suffer from the same problem as TVPI, as highlighted in the previous post in this series (namely that they don’t take into account time value, nor may they reflect the actual underlying performance of investee companies accurately if these have not received follow-on financing).

Specifically, DPI is something that many investors care deeply about: It shows how much cash has actually been returned, which in the end is what investing is mostly about.

BFP’s take

Whilst MoIC and DPI can provide useful headlines, there is one fundamental, often overlooked flaw with the latter: It can lead to misalignment of interests between the GP and the LP.

Thoughtful and long-term oriented GPs understand that maximizing cash-on-cash return of an investment may take many years. Seeing as many LPs do focus on DPI as a key performance indicator, however, some GP’s may feel the pressure to deliver on this metric early, in time for their next fundraise. In other words, divestments may happen sooner than should vis-à-vis the goal of maximizing long-term cash-on-cash returns.

On the other hand, some LPs do want to see earlier distributions and at times it may make sense to take some cash off the table and de-risk. But potential for conflict of interest is generally better avoided.