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Cash-on-cash returns: a look at fund net DPI, Asia vs. North America

In measuring private equity returns, net distributions-to-paid-in, or DPI, is just as important as net IRR because it gives an exact ratio of the amount of capital received by LPs relative to the amount of capital that they’ve paid into the fund.

Referring to Figure 1 where we compare median Asia fund net DPI (again, Market Data in solid blue) against North America (Benchmark in stripe), it is quite clear that North America has consistently outperformed Asia since 2005 with the only exception being 2016 which is still too early to assess DPI since it’s only three years into a fund’s term.

If we disregard the more recent five years since 2014 because these funds are still 5 years or younger and still actively investing or just starting to exit deals to generate realized proceeds, then looking back at vintage 2013 and earlier, i.e. vintage years 2009-2013, we see that Asia funds that are now 6, 7, 8, 9 or 10 years into the fund term have not breached the 1.0x net DPI mark: in the median, Asia funds have not fully returned LPs’ invested capital, and therefore, LPs are still at capital risk.

In contrast, median-performing North America focused funds show net DPIs reach par in 2010 - that also isn’t stellar since funds from this vintage are now 8 years old, but it is a far cry from the 0.3x in 2011 for median Asia funds. Even if we look at 2009 and 2010, the spread between North America and Asia is wide with the former clearly outperforming.

Median Asia fund net DPI vs North America

No LP aims to invest in median performing funds, so let’s take a closer look at the top quartile in Figure 2. It is clear that net DPI top quartile Asia focused funds are much better than their median brethren with DPIs above 1.0x and between 1.1x and 1.3x during vintage years between 2007 and 2010, whereas median funds are still underwater.

In 2011 and 2012, top-quartile Asia funds are also significantly better than median with net DPIs at 0.9x and 0.8x, respectively, compared to 0.3x in the median for these two years. Despite significant outperformance relative to the median, top-quartile Asia funds are still far off pace compared to top-quartile North America funds: between 2007 and 2012, North America is superior by nearly half a complete turn almost every year.

In fact, Asia's top quartile is more comparable to North America median when it comes to net DPI during vintage years 2007 through 2013 as shown in Figure 3.

Benchmark_Performance_Attribution_DPI Data_Benchmark_Performance_Attribution_DPI

There is one key takeaway from these CEPRES charts shown in the first two parts of this blog series: first, Asia net IRRs are stronger but this is likely due to unrealized valuations and/or cash flow timing rather than actual realized returns to LPs because absolute returns from net DPIs don’t support the net IRR developments.

So far a fund-level analysis of net returns has not revealed a compelling investment case for Asia relative to North America, but in the next installment of this series, we will go one level deeper and analyze the gross return characteristics at the portfolio company level and see if the picture is any different. Stay tuned.

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