A venture fund distributes newly listed shares instead of cash. The reported DPI, the cash the investor actually receives, and what happens to the carried interest when the price moves.
An in-kind distribution is booked at the share price on the day the fund hands the shares over, but the investor only banks the price at which it sells. On an illustrative 100m venture fund that distributes 3,000,000 newly listed shares at 40, reported DPI rises from 0.50 to 1.48x. An investor who sells 20 per cent lower, at 32, receives 78.4m instead of 98m and has a realised DPI of 1.284x. The carried interest, fixed in shares at 40, ends up at 20.47 per cent of the gain actually realised.
Worked in full in Venture Capital by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Venture funds distribute stock more than any other private fund, because their big exits are IPOs and IPO shares come with lock-ups and thin trading. The practice is legitimate and often sensible. It also means that the DPI on a venture fund's report, the multiple investors treat as cash returned, can contain a share price that no longer exists by the time the shares are sold.
| Input | Value |
|---|---|
| Capital paid in | 100,000,000 |
| DPI before the distribution | 0.50x |
| Shares distributed | 3,000,000 |
| Price on the distribution date | 40.00 |
| Fund's cost of the position | 10,000,000 |
| Carried interest, deal by deal on this position's gain | 20% |
| Investors' average sale price, base case | 32.00 |
Distribution value = shares × price at distribution = 3,000,000 × 40.00 = 120,000,000
Gain on the position = 120m − 10m cost = 110m. Carry = 20% × 110m = 22m, paid as 22,000,000 / 40 = 550,000 shares. Investors receive the other 2,450,000 shares, booked at 98,000,000.
Reported DPI = 0.50 + 98m / 100m = 1.48x. In Excel: =0.5+(3000000-0.2*(3000000*40-10000000)/40)*40/100000000.
The carry here is deal by deal, as in many US venture agreements. Under a whole-of-fund waterfall a fund at 0.50x DPI would first return paid-in capital to investors, so fewer shares would go to the manager on this distribution; the price mechanics below are the same either way.
Every number in the report is now fixed: the distribution, the DPI, the carry. None of them will be restated when the shares are sold.
Investors sell over the following weeks at an average of 32.00, 20 per cent below the distribution price. Lock-up expiries, index flows and many holders selling the same stock at once make such a move unremarkable for a new listing.
Cash = investor shares × sale price = 2,450,000 × 32.00 = 78,400,000
Realised DPI = 0.50 + 78.4m / 100m = 1.284x, 0.196 below the reported 1.48x. The investors as a group are 19.6m short of their statements; one investor with 5 per cent of the fund holds 122,500 shares booked at 4,900,000 and banks 3,920,000.
The manager received its 550,000 shares on the same day and bears the same fall, so most of the price risk is shared. But not all. Recompute the carry on the price actually realised: 20% × (3,000,000 × 32 − 10m) = 17.2m. The manager's shares are worth 17.6m. It has kept 400,000 more than 20 per cent of the realised gain, an effective carry rate of 20.47 per cent, because the carry was fixed as a number of shares at the higher price.
| Sale price | Change | Investor cash | Realised DPI | Gap to reported | Carry on realised gain | Manager's shares worth | Effective carry |
|---|---|---|---|---|---|---|---|
| 48.00 | +20% | 117.6m | 1.676x | −0.196 | 26.8m | 26.4m | 19.70% |
| 40.00 | 0% | 98.0m | 1.480x | 0.000 | 22.0m | 22.0m | 20.00% |
| 32.00 | −20% | 78.4m | 1.284x | 0.196 | 17.2m | 17.6m | 20.47% |
| 24.00 | −40% | 58.8m | 1.088x | 0.392 | 12.4m | 13.2m | 21.29% |
The effect is symmetric for DPI: a rising price makes the report understate. But in practice the asymmetry is in behaviour: investors who hold a rising stock usually re-label the gain as their own public equity return, while a falling one shows up as a shortfall against a figure already reported to their committee. For the carry the direction matters: on a fall the manager's effective share rises above 20 per cent, on a rise it falls below.
The size of the gap scales with the share of the fund's value that leaves in stock. On a venture fund whose best company listed, that can be most of the DPI, and the difference between 1.48x and 1.284x here is 0.196 of a turn on a single distribution.
A stock distribution moves DPI by the shares times the price on the day; the investor's money moves by the shares times the price it sells at. On this case that is 1.48x reported and 1.284x banked, and a carry fixed in shares that becomes 20.47 per cent of the realised gain. Venture Capital follows one fund from the multiple on the initial cheques to the multiple in the bank account, and the free workbook for this case carries the four multiples, and the gaps between them, as live formulas. For why those multiples differ in the first place, see MOIC vs TVPI in a venture fund.
After an IPO the fund's shares are often locked up, and selling a large block can push the price down. Distributing the shares lets each investor decide when to sell and avoids a second layer of trading cost inside the fund. In this example the fund hands over 3,000,000 shares worth 120m at 40 instead of trying to sell them itself.
Not until the investor sells. The fund records the shares at the distribution price, so reported DPI moves from 0.50 to 1.48x. An investor who sells 20 per cent lower, at 32, receives 78.4m rather than 98m: a realised DPI of 1.284x, 0.196 below the report. One investor with 5 per cent of the fund is 980,000 short of its statement.
On the value at the distribution date, usually the closing price or a short average set by the LPA. Here 20 per cent of a 110m gain at 40 is 22m, paid as 550,000 shares. If the price then falls to 24, those shares are worth 13.2m against a realised gain of 62m: 21.29 per cent instead of 20, because the carry was fixed in shares at the higher price.
This article is one calculation from Venture Capital. 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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