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TVPI_vs_IRR

The document compares two key metrics for assessing investment performance: TVPI (Total Value to Paid-In) and IRR (Internal Rate of Return). TVPI measures the total value generated relative to the capital invested, while IRR accounts for the timing of cash flows and is used for comparing investments with varying cash flows. Each metric has its pros and cons, with TVPI being simpler to calculate but not considering the time value of money, and IRR providing a more nuanced view but being sensitive to cash flow timing.

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Nilesh Lingras
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17 views

TVPI_vs_IRR

The document compares two key metrics for assessing investment performance: TVPI (Total Value to Paid-In) and IRR (Internal Rate of Return). TVPI measures the total value generated relative to the capital invested, while IRR accounts for the timing of cash flows and is used for comparing investments with varying cash flows. Each metric has its pros and cons, with TVPI being simpler to calculate but not considering the time value of money, and IRR providing a more nuanced view but being sensitive to cash flow timing.

Uploaded by

Nilesh Lingras
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Tushar Kore

TVPI vs IRR
Key Metrics to Assess Investment Performance
Tushar Kore

Explanation:
TVPI - Total Value to Paid-In measures the total value
created by an investment relative to the capital
invested.

IRR - Internal Rate of Return is a discount rate that


makes the net present value (NPV) of all cash
flows equal to zero. It's a time-sensitive measure
of performance.
Tushar Kore

Interpretation:
TVPI - TVPI > 1: The investment has generated value
above the capital invested.
TVPI < 1: Value generated is less than the
capital invested.
Higher TVPI indicates better returns in the
long run.

IRR - A higher IRR suggests a more profitable


investment.
Used to compare projects with different cash
flows over time.
Tushar Kore

Formula:
Cumulative Distributions + Residual Value​
TVPI = Paid-In Capital
Cumulative Distributions: Cash or other assets returned to
investors.
Residual Value: Remaining equity in the investment.
Paid-In Capital (PIC): Total amount of money that investors have
committed or contributed to an investment fund.

IRR = Cash Flow


(1+r)n
- Initial Investment
Tushar Kore

Time Sensitivity:
TVPI - Focuses purely on the overall value created,
ignoring when returns are realized.

IRR - Takes into account the timing of cash flows,


rewarding early returns more heavily.

Usage:
TVPI - Useful for understanding the overall multiple
of capital in venture capital or private equity.

IRR - Effective for comparing investments where


cash flow timings vary.
Tushar Kore

Time Factor
TVPI - Does not account for the time value of money.

It simply shows a multiple of how much value


has been created from the initial investment.

IRR - Takes the time value of money into account.

Early returns are more valuable than later


returns, and IRR adjusts for this.
Tushar Kore

Pros:
TVPI - Simple to calculate.
Gives a clear multiple of total returns.

IRR - Accounts for the timing of returns.


Provides a clear comparison across
investments.

Cons:
TVPI - Doesn't consider the time value of money.
Can overestimate the attractiveness of
investments with late cash flows.
IRR - Sensitive to cash flow timing.
Can produce misleading results for
unconventional cash flows (multiple IRRs).
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Tushar Kore

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