Residual Value to Paid In (RVPI) explained – Grasping a key private equity metric

A bird in the hand is worth two in the bush.

In the case of private equity investments, the metrics Distributed to Paid In and Residual Value to Paid In can essentially be compared to the birds in the hand and in the bush, respectively.

That’s because DPI shows your realized return on an investment, while RVPI shows the unrealized return – that is, the market value of your investment.

When evaluating your private equity investments, these two metrics – along with IRR and TVPI – are key figures to look at. Together, the four key metrics offer a comprehensive overview of the various funds’ performance.

Without more ceremony, let’s take a look at those birds in the bush.

Example of a comprehensive private equity overview

To make sure we’re on the same page, let me begin by showing you an example of an overview of investments in four private equity funds. That’ll give us a good foundation to build on.

Such an overview typically includes the vintage year, which is the year the fund was established, and the current market value of your investment in each fund. It also shows how much capital you already contributed to the fund and how much capital the fund already paid you in distributions.

These overviews are crucial to continuously monitor the performance of the various funds and keep an overview of your unfunded commitments, so you always know how much liquidity you need to meet capital calls from the funds.

In our knowledge hub, you can also find in-depth explanations of the other three of the four key metrics: IRR, DPI, and TVPI.

Without further ado, let’s move on to the main character of this article – Residual Value to Paid In. And, importantly, what to keep in mind when interpreting this metric.

What does Residual Value to Paid In reflect?

Residual Value to Paid In is a ratio metric that gauges the current market value of your investment relative to your contributions to the fund. As such, it reveals how many times you, at a given time, have recouped your investment in the form of unrealized return.

Let’s say you gave a private equity fund $1 million to invest in the company Three Little Birds. A couple of years later, your share in the company is estimated to be worth $1.15 million. In this case, at this point, you’ve achieved an RVPI of 1.15 and an unrealized return of 15%.

Residual Value to Paid In is a ratio metric that gauges the current market value of your investment relative to your contributions to the fund.

RVPI does not account for the fund's life cycle

The way private equity funds work is that they raise capital from investors, which they use to buy or invest in portfolio companies. Then, they help the companies unleash their potential and sell them with a profit years later.

As such, private equity funds usually don’t distribute any realized return during the first years of their life cycle. In those years, it’s quite relevant to look at the funds’ RVPI to continuously monitor if they’re creating value in the portfolio companies.

Like DPI, RVPI doesn't consider how long you've held the investment. Therefore, you can't compare this metric across funds – unless, to a certain degree, if they have similar vintage years – as the figure will evolve depending on how far the fund is in its life cycle.

However, be aware that comparing different types of funds can be problematic, as, for example, a capital fund and a venture fund have very different strategies and risk profiles.

While DPI doesn’t consider the unrealized gain of your private equity investment, RVPI, conversely, doesn’t account for the realized gain of your private equity investment. Examining each metric in isolation can therefore potentially underestimate the overall gain of the investment.

You should always look at the bigger picture, and the four key metrics IRR, DPI, RVPI, and TVPI are four important pieces of the puzzle when evaluating your private equity investments.

RVPI will initially rise and then fall

While DPI should rise as the fund progresses through its life cycle, RVPI will first rise and then fall.

As the metric indicates the market value of your share of the fund's portfolio, the figure starts at 0 until the fund invests in its first company. Subsequently, the metric will increase as the fund buys or invests in more companies.

A figure of 1 means the market value of your private equity investment is exactly equal to the total amount of capital you’ve contributed to the fund.

A figure higher than 1 indicates your investment is worth more than you’ve contributed, indicating an unrealized return. Conversely, a figure lower than 1 suggests that your investment is, at this time, worth less than the amount of capital you contributed to the fund.

The market value of the fund’s portfolio companies is expected to increase during the investment period. As such, the metric is highest after the end of the investment phase of the fund’s life cycle, right before the fund starts selling the companies.

As the fund sells off portfolio companies in the last phase of its life cycle, RVPI will begin to decline since the sales will naturally reduce the market value of the portfolio as the market value becomes realized.

RVPI essentially starts to fall when DPI begins to rise. Additionally, it may decline in mature funds where it is not uncommon for portfolio companies to decrease in value, as some companies may not develop as expected and may be challenging for the fund to exit.

The metric will again end at 0 when the fund has sold all portfolio companies and distributed the profits to investors.

A figure higher than 1 indicates your investment is worth more than you’ve contributed, indicating an unrealized return. Conversely, a figure lower than 1 suggests that your investment is, at this time, worth less than the amount of capital you contributed to the fund.

Residual Value to Paid In is “the bird in the bush"

Interpreting a fund's Residual Value to Paid In can be challenging, as it's difficult to know whether a high figure means that the fund has exceptionally good investments or if it means that the fund has been inefficient in realizing its investments.

Moreover, the metric reflects the unrealized gain of your investment, so it's not a guaranteed return. It remains birds in the bush, and the figure is highly dependent on how the individual private equity fund carries out their ongoing valuations of its portfolio companies.

Only when a company is sold off, and the fund makes a distribution to you, the birds will come flying from the bush to your hand, and you’ll know exactly how many you have.

And, to repeat myself, crucial conclusions cannot be drawn solely from RVPI. This metric should always be considered alongside other key metrics to provide an accurate picture of a fund's performance.

Only when a company is sold off, and the fund makes a distribution to you, the birds will come flying from the bush to your hand, and you’ll know exactly how many you have.

Key Takeaways:

• RVPI measures the unrealized return on your private equity investment.

• It reveals how many times you, at a given time, have recouped your investment in the form of unrealized return.

• The market value of the fund’s portfolio companies is expected to increase during the investment period. As such, RVPI is highest after the end of the investment phase of the fund’s life cycle, right before the fund starts selling the companies.

• As the fund sells off portfolio companies in the last phase of its life cycle, RVPI will start to decline as sales will naturally reduce the market value of the portfolio.

• RVPI essentially begins to fall when DPI starts to rise.

• RVPI does not account for the duration of your investment.

• Interpreting a fund's RVPI can be challenging, as it's unclear whether a high figure indicates exceptionally good investments or poor realization of investments by the fund.

• Since RVPI reflects the unrealized gain of your investment, it’s not a guaranteed return. It remains birds in the bush, and the figure is highly dependent on how the individual private equity fund carries out their ongoing valuations of its portfolio companies.

• Crucial conclusions cannot be drawn solely from RVPI. This metric should always be considered alongside other key metrics to provide an accurate picture of a fund's performance.

That was all from me on RVPI. You're very welcome to reach out if you have any questions about RVPI or our wealth platform.

Oh, and if Three Little Birds is stuck in your head for the rest of the day, you're welcome.