For a long time, venture capital institutions have always regarded the fund's IRR level as the core indicator of the fund's earning ability, and are willing to use the IRR level to publicize the fund for subsequent fund-raising. However, everyone avoids talking about one number - DPI.
For venture capital, DPI refers to the dividend rate of invested capital, which is the proportion of the dividend and investment amount of the fund contributor (LP), that is, the cash return received by LP. When the DPI is equal to 1, it means that the LP has recovered the cost. When it is greater than 1, it means that the LP has obtained excess return. IRR is the internal rate of return of the fund. As the valuation of the project invested by the fund rises, the IRR will also rise. Therefore, many funds perform very well before the project is listed.
However, an obvious problem is that after the projects invested by many funds are listed, the number of cash returns earned by fund withdrawal is not very good. Especially in the past one or two years, the performance of new shares after listing frequently failed to meet expectations, resulting in some funds even unable to recover their costs, that is, the DPI is less than 1.
This is all seen by LP. Therefore, LP with painful market lessons and rich experience pays more and more attention to the DPI of the fund, and even takes it as the standard to evaluate the performance of a fund. This year's government work report pointed out that the whole market registration system will be comprehensively promoted, which means that the projects invested by the fund will face more fierce competition after landing in the secondary market, and the stock price performance will be more variable. Therefore, many LPS began to pursue "safety in the bag", which tested GP's investment and exit strategy to a great extent.
around the problem of DPI, how to find the maximum common divisor between GP and LP p align = "center" lp: fund DPI has become an important assessment index
For a long time, IRR has been widely used in the venture capital industry, because it combines the time value of funds into the calculation and pays more attention to the efficiency of investment. IRR can also be divided into book IRR and cash IRR. Only cash IRR can represent the actual exit situation, and Book IRR can only reflect the book situation. During the duration of the fund, most funds will only publish the book IRR.
Around 2015, with a large amount of hot money pouring into the VC / PE market, it promoted the establishment of many new funds and the valuation of many entrepreneurial projects, especially many Unicorn projects, which created a high book value in a short time. "The IRR of many head funds is very high, because they have invested in some head projects at each stage, and the book return is very high." A VC organization in South China told reporters.
At that time, the primary market financing was in full swing. With a piece of PPT and the IRR number of a single project, many GP could make LP pay out willingly. LP also tended to choose the fund with high book IRR and paid less attention to DPI.
However, behind the high IRR is likely to be low DPI, which is very common in the industry. "I know an individual LP who has invested for eight years without recovering the cost. The DPI of that fund is less than 1." The above IR source told reporters that at present, the situation of peers is almost the same, "if DPI has 1.5, it is good, and reaching 2 is a very high level." The person said.
Why is there such a gap? In 2018, China's capital market ushered in another wave of listing, a large number of start-ups began to land in the capital market, and funds were frantically looking for exit channels. However, different from the previous waves of listing, the proportion of breaking of listed new shares has increased, and even Unicorn enterprises once popular in the primary market have also suffered breaking. In addition, although some companies are listed, they encounter liquidity depletion in the secondary market, and the stock price still does not perform well. Especially after the launch of the science and innovation board and the pilot registration system of the gem, the secondary market breaks more frequently. This makes the fund can not get a good cash return even if it exits, that is, the DPI is very low.
At this time, many LPS suddenly found that the high IRR claimed by the fund is only "paper wealth". The project IPO seems to be successful, but it does not necessarily become real gold and silver and fall back into their pockets. "Now LP really pays more attention to the indicator of DPI and hopes to be safe in the bag. This is also the performance of LP's growing maturity." Wu Di, deputy general manager of institutional Business Department of Qianhai Shenzhen Hong Kong fund Town, told reporters that the performance of the above secondary market will also be transmitted to the primary market. As a result, many industries are reshaping the valuation, the project valuation will not rise so fast as before, and the IRR of the fund does not have to be as high as beforeP align = "center" gp: DPI and IRR should be viewed rationally and comprehensively
"When raising funds, we will also encounter LP's preference for DPI data. This situation is common now. In essence, it reflects LP's lack of confidence in the absolute profitability of the existing market management institutions, or expresses its anxiety about the market in this way. It requires that the absolute return is one size fits all, but it may be an effective filtering method for LP." Hu Yan, President & partner of ABN capital operation, believes that for GP, IRR and DPI should be combined to treat these two indicators rationally.
Hu Yan further analyzed that DPI reflects the multiple of the fund's earnings. The higher the multiple, the better the investment performance, and the investment level of the fund can be reflected; IRR reflects the management level of the fund. If a relatively stable or relatively high IRR can be maintained for ten or eight years, it shows that the institution has strong fund operation ability and high fund use efficiency.
But in fact, in the game of the market, the more head institutions have stronger capital operation ability and create higher IRR "Some strong head institutions have greater bargaining power when negotiating with the project. For example, the valuation of the project in round a is 1 billion, and the valuation of round B has reached 1.5 billion or 2 billion, but these institutions can go in according to the price of round a before the start of round B, so that they can get the valuation of round B immediately." The investment director of a VC institution in Shenzhen told reporters that this operation can enable GP to show a high IRR when reporting to LP internally.
Wu Di, who has participated in venture capital fund investment for many times, also understands LP's urgent demand for DPI. "Now investors are not unanimously optimistic about the market. Instead, they think that the market is in a state full of shock and uncertainty. It's not impossible to make investment more stable." Wu Di believes that as a GP, there is a good opportunity to sell through agreement transfer or old share transfer before the IPO of the project, and the reduction and cashing after the listing of the project according to the reduction regulations is also a responsible investment method for LP.
On the one hand, GP pursues the growth and higher return of the project, on the other hand, LP pursues "safety in the bag". In the face of this group of contradictions, how does GP consider it? "First of all, we also pay more attention to the chassis management and cash flow management of institutions, so we will be relatively grounded in measuring the fund return. In fact, at present, most external investors are continuous investors.
From the perspective of your investment philosophy, I think you should follow your investment strategy as far as possible; From the perspective of LP, it's the same. If you find an institution that matches your expectations, the partners you choose are also different for medium and short-term high returns and long-term sustained medium and upper returns. Only matching will not be too voluminous. " Hu Yan saidP align = "center" under the registration system, the investment and withdrawal of the fund should be considered comprehensively
The contradiction between GP and LP may be more focused under the upcoming registration system in the whole market. "Under the registration system, the competition in the secondary market is more intense, and more enterprises may face the problem of tight liquidity. At that time, the institutions will also be very passive, it is not easy to retreat, or they will have to smash their own sector as soon as they retreat, so they may not wait for the performance of enterprises to explode, and the institutions will withdraw in time." Wu Di believes that after the listing of the enterprise, GP should "retreat when it should", and return the subsequent option to LP.
In fact, the level of DPI is closely related to the exit rhythm of the organization. At present, some institutional people believe that due to the obvious upside down trend of valuation in the primary and secondary markets, the future IPO may not be the best exit channel. For medium and early-stage projects, choosing to exit at a high premium in the primary market is also a good way to deal with the current market changes.
Another trend is that LP generally strengthens direct investment more and more. Some resource LP will consider setting up a fund and investing in projects by themselves when they see that the investment income does not meet their expectations. But in Hu Yan's view, the private equity investment industry is not suitable for everyone to participate. "The cycle is too long. A fund can only be verified for ten years. Ten years is only the beginning, which requires high control ability of fund managers."
Hu Yan believes that from the perspective of improving DPI, as a fund, we need to have an overall concept. "I find that some investors in the market have good vision and are very accurate. They enjoy the process of looking for projects and judging projects, but they lack some consideration when considering the allocation of the whole fund." In her opinion, when considering a fund as a whole, we should consider not only the investment logic, but also how to connect the investment logic and exit logic, including how to layout the whole fund in the future, so as to make the whole institution operate more benign and sustainable.
