Buoyancy Test: Looking at TVPI Ratios

Last month we reviewed wider performance-based analyses of private markets to further study how they behave. This month we review investment success as measured by Total Value to Paid In (TVPI) to determine how funds of different styles have different profitability ratios and what may lead to disparities.

To do so, we took a sample of all Cobalt funds with cash flow histories and split out their TVPI by style. First look at total funds with TVPI over and under 1, then looking at the ratio of how many funds have a <1 TVPI compared to the total funds for that style.

To simplify the terminology, we call it the “underwater ratio” to indicate the proportion of funds in that style that are holding less value than was paid in.

Key Takeaways

Styles with the lowest underwater ratio are Secondaries, Fund of Funds, Credit, and Buyout. This means most of their funds are holding a positive TVPI.

Secondaries and Fund of Funds make sense as Secondary investors tend to invest in funds with positive outlooks, and Fund of Funds gain from a higher level of diversification in their investments. Yet curiously Co-Investment does not seem to benefit from the same advantages despite having similar characteristics.

It’s hard to speculate, but the discrepancy could come from a lower diligence in Co-Investment allocations leading to higher risk, differing fee structures, or the smaller sample size compared to Buyout, for instance. Speaking of Buyout, it’s a robust and lower-risk investment structure, so its presence here is unsurprising.

Credit, however, is a surprise because we assume the funds would carry negative value, especially from their distressed investments. But the data argues otherwise. Perhaps most credit investments are either safe or have little left to lose and consequently present a low risk of loss of value.

On the opposite end, Venture Capital and Real Estate lead the list in the proportion of funds under TVPI of 1. Venture Capital’s underwater value is understandable, as the funds tend to require significant burn before they can create value.

However, real estate funds have an even higher rate of negative carry value—an unexpected outcome for a stable asset with rent income. However, what likely drags this category down is maintenance outpacing property value appreciation and/or excess vacancy not providing the anticipated rent income stream for many funds.

Looking Ahead

Given the estimates are time agnostic, it is difficult to extrapolate any discoveries from our charts. This analysis could serve as a proxy for resistance to economic effects as the styles often least effected by economic drawdown—credit and buyout, for example—hold consistent positive value while venture capital and real estate may lose interest during such a period.

The converse is that profitable investments may be exited earlier to pay for the unprofitable ones, so during downturns some of the funds with positive carry may be the first to be raided, and thus suffer their own valuation drops.

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