Private Equity and Private Debt
Structure and lifecycle
Private markets are raised through limited partnerships: the GP manages the fund, LPs commit capital that is drawn down over an investment period, and proceeds return as distributions. Capital is locked for years, so the J-curve - early negative returns from fees, later gains - is normal. Understand the fund lifecycle, vintage-year diversification, and the distinction between committed and invested capital.
Metrics
- IRR: a money-weighted, time-sensitive measure that implicitly assumes reinvestment at the IRR.
- TVPI = (cumulative distributions + residual NAV) / paid-in capital.
- DPI = distributions / paid-in capital; RVPI = residual NAV / paid-in capital.
- PME compares fund cash flows with a public index, adjusting for market returns over the same period.
Private debt spans direct lending, mezzanine, unitranche, distressed, and PIK structures. Analyze covenant quality, lien position, floating versus fixed rate, and recovery assumptions. Floating-rate senior loans benefit when rates rise.
Traps
- Believing a high IRR proves skill; early distributions inflate IRR while leaving multiples unchanged.
- Treating unfunded commitments as a return rather than a future liability.
- Comparing a young fund's TVPI with a mature fund's, ignoring the J-curve.
- Accepting NAV as a market price when it is an estimate, often conservatively marked.
Worked rule of thumb
A fund has paid-in capital of $80m, distributions of $60m, and NAV of $50m. TVPI = 110/80 = 1.375x; DPI = 0.75x; RVPI = 0.625x. Because timing drives IRR but not multiples, always read IRR alongside TVPI and DPI.