private market tomatoes
I did a post not so long ago trying to help shed some light on the terminology commonly used in the investment industry. The last post was about call options and the feedback I got was positive, especially from younger people starting their investment journey.
Over the last 5 years the interest in private markets has skyrocketed and therefore we need to ensure we are up to speed with how this market works, the terms used and how they play a part in portfolio management.
In this post, I wanted to talk about ‘TVPI’ which stands for ‘Total Value to Paid-In’.
This is a very common metric in the private equity space, especially when analysing performance.
It shows the value created relative to the invested capital by the investors (LPs or ‘Limited Partners’ – we will come back to this in the future!)
TVPI formula is:
Total Value (Realised + Unrealised)
/
Paid-In Capital
Realised Value includes cash distributions paid back to shareholders from portfolio investments.
Unrealised Value is the current estimate of remaining investments in the portfolio.
Paid-In Capital is total capital investors have paid into the fund.
How to use the metric?
If TVPI exceeds 1, that usually is a good sign for investors and value has been created.
If it is less, that’s not a good sign.
TVPI is similar in some ways to ROI or Return on Investment. The key difference is that ROI only includes realised gains on an investment, hence why TVPI is specific to private equity as they tend to be early stage or pre profit businesses.
To simplify, let’s imagine you have a garden and are planning on growing some tomatoes. You plant your seeds and spend money on caring for them (soil, watering can, etc.). This is your ‘Paid-In’.
After 60 days you have some ripe tomatoes and decide to take a few for a salad. These become your ‘Realised Value’.
The remainder are maybe not quite ripe enough and are your ‘Unrealised Value’ that you can continue to harvest for consumption or sell to the neighbours.
Private market assets are becoming more important and playing a bigger part in client portfolios. Therefore we need to ensure we are continuing to understand the lexicon used by investors in the market.
