The private-equity industry has a cash problem (2024)

How much money are your private-equity investments making? The question is easy to answer for other asset classes, such as bonds or publicly traded stocks. All that is required is the price paid at purchase, the price now and the time that has elapsed between the two. It is less obvious how returns for private-equity investments should be calculated. Capital is earmarked for such investments, but it is only “called” once the investment firm has found a project. There is little information about value once invested. Cash is returned in lump sums at irregular intervals.

An alphabet soup of measures are supplied to investors, which are known as “limited partners”. There is irr (the internal rate of return, calculated from returns to a specific project), mom (the estimated value of a fund, as a “multiple of money” paid in) and a dozen more besides. All have flaws. Some rely on private valuations of assets, which might be flattering; others do not take into account the cost of capital. But nitpicking seems pedantic so long as one measure stays high: cash distributions measured as a share of paid-in capital, known as “dpi”. This concerns the money that private-equity firms wire to the pension funds and university endowments that invest in them each year, as a share of the cash those investors have paid in. Unlike irr or mom it is hard to game and takes into account the meaty fees charged for access to funds.