Private Equity: Strategies and Fund Returns
Private equity invests in ownership interests outside public stock markets. Compare venture, growth and buyout strategies, then distinguish committed capital, paid-in capital, distributions and residual value when measuring a fund’s performance.
The key decisions, at a glance
| Concept | What to do | Watch for |
|---|---|---|
| Venture capital | Early businesses depend on uncertain growth and later financing. | A large addressable market is not realized revenue. |
| Growth equity | Expansion capital supports a more established business. | Growth investing does not always imply control. |
| Buyouts | Control, operating change and financing shape equity outcomes. | Leverage magnifies losses as well as gains. |
| Fund metrics | DPI measures distributions; RVPI measures residual value; TVPI is their sum. | TVPI includes unrealized marks and ignores timing. |
1. Venture capital
Early businesses depend on uncertain growth and later financing.
Watch for: A large addressable market is not realized revenue.
2. Growth equity
Expansion capital supports a more established business.
Watch for: Growth investing does not always imply control.
3. Buyouts
Control, operating change and financing shape equity outcomes.
Watch for: Leverage magnifies losses as well as gains.
4. Fund metrics
DPI measures distributions; RVPI measures residual value; TVPI is their sum.
Watch for: TVPI includes unrealized marks and ignores timing.
Original worked case
A 1.5x fund has not returned all its value in cash
Given: A fund has called $20m, distributed $8m and reports $22m of remaining net asset value.
01 Cash returned
DPI = 8 / 20 = 0.40x.
02 Value remaining
RVPI = 22 / 20 = 1.10x.
03 Total value
TVPI = (8 + 22) / 20 = 1.50x.
Answer and interpretation
Only 0.40x has been distributed. Most reported value remains exposed to valuation changes and future realization.
× paid-in capital · scale 0 to 1.5
| Scenario | Value |
|---|---|
| Distributed (DPI) | 0.4 |
| Residual (RVPI) | 1.1 |
| Total (TVPI) | 1.5 |
Illustrative fund. TVPI adds distributed and residual value; the bars are not separate investments.
Change one assumption
If the residual value falls to $16m, TVPI falls to 1.20x while DPI stays at 0.40x.
Independent teaching example with the stated assumptions. Not an official exam question, marking key or observed market trend.
Understand the method
Part 1
Match the equity strategy to the company’s stage
Venture capital commonly finances young businesses whose outcomes depend on product adoption, subsequent financing and eventual scale. Growth equity typically supports expansion in more established businesses, with the exact degree of control and leverage varying by transaction. A buyout usually acquires control and may combine operating change with substantial debt. Each strategy requires a different explanation of where value is expected to come from.
An equity investor receives the residual after senior claims. A company can grow revenue while the original equity investor suffers dilution or receives little after debt repayment. Track the ownership percentage, security rights, financing needs and exit claims alongside operating forecasts. A high headline company valuation is not the same thing as realizable proceeds for every share class.
Part 2
Follow commitments through calls, assets and distributions
A closed-end fund normally draws committed capital over time, makes investments, and returns proceeds as assets are realized. During early years, fees and costs may be incurred before investments mature. Reported net performance can therefore initially be negative, often described as a J-curve pattern. The shape is not guaranteed; vintage conditions, valuation policy and the speed of exits alter the path.
Uncalled commitments remain a liquidity obligation even when they do not appear in reported invested NAV. A portfolio plan should distinguish committed, called, distributed and still-invested capital. Recycling provisions may allow some proceeds to be reinvested under the agreement. Read those terms before assuming that every distribution permanently reduces future funding needs.
Part 3
Use DPI, RVPI and TVPI together
Using a consistent investor-level basis, DPI equals cumulative distributions divided by paid-in capital. RVPI equals residual value divided by paid-in capital. TVPI is their sum. A 1.8x TVPI comprising 0.2x DPI and 1.6x RVPI relies much more on unrealized valuations than a 1.8x TVPI comprising 1.6x DPI and 0.2x RVPI. The same total can therefore represent very different realization risk.
IRR complements those multiples by incorporating timing, but it can be sensitive to early distributions and financing. Compare funds at similar ages and use consistent net-of-fee data. Subscription borrowing can postpone investor calls and mechanically affect investor IRR without changing an asset’s operating result. A sound comparison explains the financing and cash-flow timing instead of treating one reported metric as a complete ranking.
Part 4
Separate operating improvement, multiple change and leverage
Enterprise value can rise because earnings grow or because buyers pay a higher valuation multiple. Equity value additionally depends on net debt. Paying down debt from genuine operating cash flow can increase the equity claim even when enterprise value is unchanged. Conversely, refinancing that increases debt and funds a distribution changes the timing of investor receipts while leaving a larger claim ahead of equity.
Attribution should show these mechanisms separately, including fees, follow-on equity and dilution. A manager who relied on rising market multiples has demonstrated a different result from one who improved margins with stable multiples. Stress the exit multiple, earnings and debt balance together: leverage magnifies downside as well as upside and can make a modest enterprise-value decline a large equity loss.
Read the fund report without mixing measures
Commitment
- What it tells you
- Maximum contractual funding obligation subject to terms
- What it leaves out
- Timing of calls
DPI
- What it tells you
- Cash returned relative to paid-in capital
- What it leaves out
- Value still invested
RVPI
- What it tells you
- Reported residual value relative to paid-in capital
- What it leaves out
- Certainty and timing of realization
IRR
- What it tells you
- Cash-flow timing and implied annualized return
- What it leaves out
- Scale, valuation reliability and full risk
More worked practice
Original teaching cases. Use the stated assumptions; these are not official exam questions or marking keys.
Calculate a dated fund IRR and reconcile the multiple
Given: An investor pays $100 at time 0, receives $60 at the end of Year 1 and $60 at the end of Year 2, with no residual value, fees or other flows.
- 1DPI and TVPI are both (60 + 60) / 100 = 1.20x; RVPI is zero.
- 2The annual IRR solves -100 + 60/(1+r) + 60/(1+r)² = 0. Setting x = 1+r gives 100x² - 60x - 60 = 0.
- 3The positive solution is x = (60 + √27600) / 200, so r = 13.07%, rounded.
Interpretation: If the same $120 were paid entirely at Year 2, the multiple would remain 1.20x but annual return would fall to √1.2 - 1 = 9.54%. Earlier cash changes the investor return even when total proceeds are equal.
Check your understanding
Answer first, then open the explanation. These checks are original practice and do not generate an exam score.
1. Does a 2.0x multiple mean 100% annual return?
No. It means total value equals twice the chosen capital denominator. Annual return requires timing.
2. Why compare funds by vintage and maturity?
Younger funds typically have more unrealized exposure and a different cash-flow stage. A raw comparison can confuse maturity with skill.
3. Can debt repayment create equity value with flat enterprise value?
Yes, if other claims are unchanged. The debt claim shrinks and the residual equity claim rises, but the source and cost of the repayment still matter.
Common questions
Is committed capital the denominator for TVPI?
Typically TVPI uses paid-in capital. Uncalled commitments are a future funding obligation, not capital already contributed.
Does a 1.5x TVPI mean a 50% annual return?
No. It is a multiple of capital without an annual time dimension. You need dated cash flows to calculate an IRR.
Sources and scope
The sources below establish their stated framework or subject context. Calculations and cases are our own teaching material; these sources do not endorse them or establish complete exam coverage.
- CAIA curriculum and study tools
Official curriculum, companions and required readings for the exam year. The current page now links to 2027 materials.
- CFA Institute: Investments in Private Capital (2026)
Private capital structures and company lifecycle context. Supporting concept reference, not a CAIA curriculum crosswalk.
- ILPA: Principles and best practices
Alignment, governance and transparency in private fund relationships. Our fee and transaction cases use independently stated terms.
- CAIA 2027 curriculum overview
Published topic categories and Emerging Topics reading titles for 2027. The overview is not the complete learning-objective list.
By MiloPrep editorial team. Updated 10 October 2026. Independent study notes, not affiliated with or endorsed by CAIA Association. How we prepare our content.
Notes
- * Study scope: Selected study concepts, not complete curriculum coverage. Match your sitting to the official exam-year materials; CAIA’s current resource page now links to 2027. ↩ Return to content