When evaluating opportunities, investors should make note of two distinctions: MOIC/TVPI v. IRR and Net v. Gross Multiple.
MOIC/TVPI v. IRR -- Each of these figures are measures by which investors can track fund performance. Specifically, MOIC stands for multiple on invested capital and represents the ratio of the current return to the initial investment. TVPI stands for Total Value to Paid-in-Capital, which represents the current value of the investment to the amount of capital contributed to the fund by the Limited Partners. Here capital contributed refers to the amount that an investor contributes in the form of capital calls, which can be made over time. IRR, internal rate of return, is equal to the discount rate at which the net present value of all cash flows is equal to zero. Generally, a project or investment is deemed profitable if the IRR is greater than the cost of capital. The benefit of IRR is that it takes into account the time value of money as it discounts the time of each cash flow back to the present. It is important to take into account multiple accounts of measurement as each measurement method measures something different, although each offer insight into the performance of an investment.
Net v gross multiple -- Net and gross multiples generally refer to the multiple corresponding to return on investment, but with a couple key differences. Net multiples are comprised of the total amount of return plus management fees and carried interest, while gross multiples include only the fund’s return. Particularly in deals involving large investment amounts and/or a large return on investment, management fees and carried interest can be substantial figures, which in this case would account for a large differential between net and gross multiple. It is important to monitor the difference between net and gross multiple over time, as a gap between the two persisting after the initial years of the fund can reflect poorly on the GPs management of the fund. Net v gross multiple should be used in conjunction with the other metrics spelled out above in order to get a more comprehensive, nuanced view of fund performance.
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