DRIP shares grow with NAV, not with the sales effort, so counting them as fundraising makes flat sales look like steady growth.
DRIP inflows equal the distribution rate times the participation rate times opening NAV, so their share of gross inflows grows every year the fund grows, even when new sales stop growing. In an illustrative evergreen fund paying 6 per cent with 55 per cent of investors reinvesting, the DRIP adds 3.3 per cent of NAV a year: it is 2.2 per cent of gross inflows in year two and 14.9 per cent by year seven, when $105.2m of the $705.2m reported comes from investors who were already in the fund. Count it as fundraising and gross flows keep rising while new sales have been flat at $600m for four years.
Worked in full in The Private Wealth Fundraiser by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Non-traded REITs, BDCs and the newer evergreen private equity and credit funds sold through wealth channels all offer a distribution reinvestment plan. Many investors enrol by default, so a large and predictable part of every distribution comes straight back as new shares. Prospectuses usually report DRIP proceeds separately from the primary offering. Internal dashboards, platform league tables and board packs often do not, and the distribution team ends up being credited with money nobody raised.
| Input | Value |
|---|---|
| New sales, years 1 to 7 | 300, 450, 550, then 600 a year |
| Total return on NAV | 9.0% a year |
| Distribution rate, on opening NAV | 6.0% |
| Share of distributions reinvested through the DRIP | 55% |
| Redemptions, on opening NAV | 5.0% a year |
Sales and DRIP shares are assumed to arrive at the year end, so they earn nothing in the year they come in; distributions and redemptions are struck on opening NAV. Real funds distribute monthly or quarterly, which changes the decimals and not the pattern.
DRIP inflow = opening NAV × distribution rate × participation = NAV × 6.0% × 55% = NAV × 3.3%
Cash distributions = NAV × 6.0% × 45% = NAV × 2.7%
Closing NAV = opening NAV × (1 + 9.0%) − distributions + DRIP + new sales − redemptions
DRIP share of gross inflows = DRIP ÷ (new sales + DRIP)
Excel: =OpenNAV*DistRate*Participation, with the rate product 0.0330
Year 4 as a check: opening NAV $1,314m, so the DRIP brings in 1,314 × 3.3% = $43.4m, redemptions take 1,314 × 5.0% = $65.7m and $35.5m is paid out in cash. Reported gross inflows are 600 + 43.4 = $643.4m, of which the DRIP is 6.7 per cent.
| Year | Opening NAV | New sales | DRIP | Redemptions | Gross inflows reported | DRIP share | Organic growth, reported | New money only |
|---|---|---|---|---|---|---|---|---|
| 2 | 300 | 450 | 9.9 | 15.0 | 459.9 | 2.2% | 148.3% | 145.0% |
| 3 | 754 | 550 | 24.9 | 37.7 | 574.9 | 4.3% | 71.3% | 68.0% |
| 4 | 1,314 | 600 | 43.4 | 65.7 | 643.4 | 6.7% | 44.0% | 40.7% |
| 5 | 1,931 | 600 | 63.7 | 96.5 | 663.7 | 9.6% | 29.4% | 26.1% |
| 6 | 2,556 | 600 | 84.3 | 127.8 | 684.3 | 12.3% | 21.8% | 18.5% |
| 7 | 3,189 | 600 | 105.2 | 159.5 | 705.2 | 14.9% | 17.1% | 13.8% |
| 1 to 7 | 3,700 | 331.4 | 502.2 | 4,031.4 | 8.2% |
Three things follow. Gross inflows as reported rise in every year, from $643.4m to $705.2m over the last four, while the sales effort produced exactly the same $600m each year. The DRIP lifts the reported organic growth rate by a constant 3.3 points, which is the distribution rate times participation and has nothing to do with the sales force. And the DRIP covers 66 per cent of redemptions: 3.3 against 5.0 per cent of NAV. A fund that stopped selling altogether would show net outflows of only 1.7 per cent a year, which looks like a stable book but is investors' own income going round.
| Participation | 4% payout: share | DRIP | 6% payout: share | DRIP | 8% payout: share | DRIP |
|---|---|---|---|---|---|---|
| 40% | 7.9% | 51.4 | 11.1% | 75.1 | 14.0% | 97.5 |
| 55% | 10.7% | 71.6 | 14.9% | 105.2 | 18.7% | 137.6 |
| 70% | 13.3% | 92.3 | 18.5% | 136.6 | 23.1% | 179.8 |
A high-yield credit fund with strong default enrolment can show almost a quarter of its gross inflows coming from the DRIP by year seven. That is also why a rise in the distribution rate flatters reported flows: at the same total return it pays out more and, at 55 per cent participation, takes more than half of it straight back.
Adding DRIP shares to gross sales and then using the total to judge platforms, wholesalers and the forecast. It credits the distribution team with $105.2m in year seven that no advisor sold, and it hides a slowdown: new money growth falls from 40.7 to 13.8 per cent between years four and seven while the reported figure is 3.3 points higher throughout. The DRIP is also not a source of liquidity in the usual sense. It is money the fund was about to pay out, so it reduces cash leaving rather than bringing cash in, and it disappears if the distribution is cut.
Report it on its own line. Gross sales, DRIP, redemptions, cash distributions. The reported growth rate then splits cleanly into what the channel raised and what the investors left in.
The DRIP's contribution is the distribution rate times participation times NAV, here 3.3 per cent of NAV a year, and its share of gross inflows rises to 14.9 per cent by year seven with flat sales. Strip it out before reading the trend: the companion article on why gross flows keep rising while the growth rate falls shows the same reporting gap from the sales side, and the free workbook for this case runs the full flow forecast by platform.
Not for judging fundraising. They are distributions investors chose to leave in the fund, not money an advisor raised. In the illustrative fund the DRIP brings in $105.2m in year seven against $600m of new sales, and adds a constant 3.3 points to the reported organic growth rate.
Multiply opening NAV by the distribution rate and by the share of distributions reinvested. At a 6.0 per cent payout and 55 per cent participation that is 3.3 per cent of NAV: $43.4m on an opening NAV of $1,314m. The cash paid out is the other 2.7 per cent.
In part, and that can mask weak sales. With redemptions at 5.0 per cent of NAV and the DRIP at 3.3 per cent, reinvestment covers 66 per cent of redemptions, so a fund with no new sales at all would report net outflows of only 1.7 per cent of NAV a year.
This article is one calculation from The Private Wealth Fundraiser. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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