Total value to paid-in capital (TVPI)

Total value to paid-in capital (TVPI) is an important metric for evaluating a venture capital fund’s performance. It compares the total value of a fund’s realized distributions and unrealized holdings to the amount of capital investors have contributed.

TVPI is related to another key metric: distributed to paid-in capital (DPI). The difference is that DPI measures only the capital that has been returned to investors relative to their initial investment, reflecting realized returns. In contrast, TVPI includes both realized returns and the remaining value of unrealized investments still held by the fund. Essentially, DPI shows what investors have already received, while TVPI provides a broader view, including potential future returns.

TVPI is calculated using the following formula:

In this formula:

• Distributed capital is the amount of capital that has been returned to limited partners. These distributions represent realized returns.
• Residual value is the remaining value of the fund’s assets that have not yet been liquidated. It includes the current market value of all portfolio investments still held by the fund. Residual value represents the unrealized portion of the investment.
• Paid-in capital refers to the total amount of capital that limited partners have committed and actually contributed to the fund.

Imagine a Fund X, for example, in which limited partners have invested $1 million, with $500,000 going in Company ABC and $500,000 going in Company XYZ. Now imagine that the fund sells Company ABC for $800,000, and that Company XYZ is evaluated to be worth $400,000. To calculate the TVPI, you would add the realized gain from the sale of Company ABC ($800,000) and the current valuation of Company XYZ ($400,000), then divide this total by the initial investment of $1 million. The TVPI would be calculated as:

A TVPI greater than 1.0 indicates that the fund has generated more value than the capital invested, implying a positive return. For instance, a TVPI of 1.5 suggests that for every $1 invested, the fund has created $1.50 in value.

TVPI is useful because it captures both realized and unrealized gains. This is important in the context of venture capital, where many investments are long-term and illiquid, meaning that significant portions of the fund's value may still be tied up in active investments. By including both distributed capital and residual value, TVPI provides a more holistic view of a fund’s performance compared to DPI, which only accounts for realized returns.

Note, however, that TVPI has one important downside: it does not take into account the timing of cash flows. On the other hand, the internal rate of return (IRR) metric does take these into account. For this reason, it is often used as an alternative measure to evaluate a fund’s performance.