Apr 18, 2025
What is Fund Management?
Explore how fund management works, its importance, and the vital role fund managers play in investment success.
Unlike public market investments that benefit from real-time pricing and quarterly financial disclosures, private equity and venture capital funds operate in opaque, illiquid markets. Fund managers draw down capital over time through multiple capital calls and return capital through staggered distributions. This makes evaluating performance far more complex than simply tracking a stock index or mutual fund.
To bridge this complexity, the industry relies on a set of specialized fund performance metrics tailored for private markets. These metrics help GPs communicate results clearly, and enable limited partners (LPs) to benchmark outcomes against expectations and other asset classes. Together, they provide a multi-dimensional view of a fund’s return profile.
This data is typically consolidated in investor updates and tear sheets, which offer a snapshot of key metrics like IRR, MOIC, DPI, and TVPI. These reports are critical not just for transparency and trust—but for fundraising, portfolio review, and benchmarking.
In this article, we’ll break down what fund performance means, why it matters, how it’s measured, and what metrics every GP and LP should understand.
Fund performance refers to how well a fund achieves its stated objectives, typically measured by the returns it generates for its investors over a specific period. It accounts for both realized gains (from exits and distributions) and unrealized gains (from current valuations of portfolio companies).
Fund performance is captured in periodic reports, which provide transparency and enable investors to track the progress of their capital.
Accurately measuring fund performance is essential for several reasons:
1. Investor Trust: LPs (limited partners) rely on performance data to assess a GP’s (general partner’s) ability to manage capital.
2. Capital Allocation: Strong performance metrics support future fundraising and capital reinvestment decisions.
3. Internal Analysis: Helps fund managers identify which investments are driving returns and which need strategic intervention.
4. Benchmarking and Market Comparison: Allows funds to benchmark themselves against peers and indices.
5. Compliance and Transparency: Reporting standards and industry norms require accurate fund performance disclosures.
6. Informed Decision-Making: Investors rely on performance data to decide whether to invest, hold, or exit a fund. Consistent measurement reveals whether a fund manager is delivering on promises and whether the strategy aligns with an investor’s goals
7. Risk Management: Performance analysis helps investors identify funds with higher volatility or risk, allowing for better portfolio balancing
Private equity and venture capital funds typically use the following key metrics to measure performance. The 5 methods are:
Internal Rate of Return (IRR) stands as a fundamental performance metric widely utilized across venture capital, private equity, and alternative investment sectors. Internal Rate of Return (IRR) depicts the annualized rate at which a fund’s cash flows—both capital calls and distributions—balance out to a net present value of zero.
For fund managers and limited partners, IRR provides a standardized measure that accounts for the deployment speed of capital and the duration required to generate returns.
Formula:
Where:
Ct = Net cash inflow during the period t
C0 = Total initial investment costs
t = The number of time periods
Why it matters: IRR takes into account the time value of money, which is critical in evaluating funds where cash flows are irregular and spread across many years. It is particularly helpful when comparing funds with different durations or capital deployment strategies.
Multiple on Invested Capital (MOIC) is a straightforward performance metric. MOIC measures the total value (realized + unrealized) generated by the fund to the total invested capital.
Unlike IRR, MOIC focuses purely on value creation rather than annualized returns. This makes it particularly useful for quick performance assessments and comparing investments with different holding periods.
Formula:
MOIC = Realized Value + Unrealized Value / Invested Capital
Why it matters: MOIC offers a simple ratio of return without factoring in time. While it doesn’t account for when returns are realized (unlike IRR), it is effective for understanding the magnitude of value creation.
Total Value to Paid-In (TVPI) is a comprehensive metric that measures the total value of both realized and unrealized investments in a fund relative to the capital contributed by limited partners.
Formula:
TVPI= Residual Value + Distribution Capital / Paid-In Capital
Why it matters: This metric provides a complete snapshot of fund performance at any given time, combining actual distributions with current portfolio valuations.
Distribution to Paid-In Capital (DPI) measures the amount of capital returned to investors relative to the amount they’ve contributed.
Formula:
DPI = Distributed Capital / Paid-in Capital
Why it matters: DPI is a measure of realized performance—it reflects actual cash returned to LPs. A DPI greater than 1.0 means LPs have received back more than they invested.
RVPI measures the unrealized value of a fund’s remaining assets relative to the capital that has been paid in by limited partners. In other words, it indicates how much of an investor’s contributed capital is still tied up in active, unrealized investments (i.e., investments not yet exited or distributed).
Formula:
RVPI = Residual Value / Paid-in Capital
Why it matters: RVPI is especially useful during the life of the fund, offering a snapshot of the potential future returns still locked in the portfolio. A high RVPI could signal strong remaining value, but it also depends on the quality and valuation of current holdings.
Benchmarking is the process of comparing a fund’s performance against a relevant standard (like a market index). For example, an equity fund might be benchmarked against the S&P 500. Benchmarking helps investors judge whether a fund manager is adding value beyond what could be achieved by simply tracking the market.
1. Contextualizes performance: A TVPI of 1.8 may be excellent or subpar depending on market conditions.
2. Helps LPs allocate capital: LPs often use benchmarks to determine which fund managers outperform.
3. Tracks relative value creation: Compares fund returns to broader asset classes like public equity, or to vintage year cohorts.
Measuring fund performance is not a matter of convenience—it’s a necessity for transparency, trust, and strategic decision-making. The right combination of metrics like IRR, MOIC, DPI, TVPI, and RVPI allows fund managers to present a nuanced, data-driven view of performance. When combined with benchmarking, these insights help investors understand how a fund stacks up in a competitive market.
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