I'm looking at Cambridge Associate's VC benchmark report and I see that top quartile TVPIs are anywhere above 3x. But if this 3x is across 10 years (average fund lifetime), I dont understand how CA concludes that VC IRR is between 15%-27%, as a 3x TVPI translates into 11% IRR across 10 years. Am I missing something?
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Your IRR assumptions are lower than the report because you’re likely assuming that 100% of the capital is deployed when the fund is raised.
The “IRR clock” starts when the money is pulled from the LPs and invested in a company. In normal times, a fund may take 18-30 months to fully deploy the capital raised. Some funds will actually set up lines of credit called “capital call lines” so they can draw capital from a bank to make the investment and call LP money at a later time. Because the IRR clock starts when the LPs send money to the fun, this artificially raises the IRR.
IRR isn’t the best metric for fund performance. TVPI and really DPI are the best, because, as you noticed, IRR can be manipulated.
Yes, that is clear but even when you account for the fact that they draw down funds across multiple years, it still doesnt add up.
In the 2012 Q4 report for example they show a 100.73% pooled return while only a 4.91x TVPI. Even if you assume that they deployed all of their funds in year 3, that would still only be a 25.5% IRR ->> 4.91^(1/7)-1=0.255
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