One fund's distributions shifted in time with the calls held fixed: the IRR, the peak capital out and the PME move, the multiple does not.
Shift every distribution one year later, keep the calls where they are, and recompute: on the illustrative Thornbury fund the net IRR falls from 13.29 to 10.44 per cent, 2.85 points, while the TVPI stays at exactly 1.6560x. A second year of delay costs a further 1.83 points, and the most capital the investor has out rises from 383 to 535.
Worked in full in Alternative Investments by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Exits slip. When markets close, managers hold assets longer and distributions arrive later than the pacing model assumed. The multiple on the final report may be unchanged, but the return and the cash the investor has to carry are not. The size of the damage is a calculation, not a feeling.
Thornbury is the illustrative foundation that runs through the book. It committed 600; the fund called 564 over five years and returned 791 in distributions plus a residual NAV of 143, struck with the last distribution in Year 10.
| Year | Called | Base distributions | Base net flow | Net flow, distributions one year late |
|---|---|---|---|---|
| 1 | 90 | 0 | −90 | −90 |
| 2 | 150 | 0 | −150 | −150 |
| 3 | 138 | 29 | −109 | −138 |
| 4 | 120 | 86 | −34 | −91 |
| 5 | 66 | 143 | 77 | 20 |
| 6 | 0 | 152 | 152 | 143 |
| 7 | 0 | 133 | 133 | 152 |
| 8 | 0 | 95 | 95 | 133 |
| 9 | 0 | 86 | 86 | 95 |
| 10 | 0 | 67 + 143 | 210 | 86 |
| 11 | 210 | |||
| Total | 564 | 934 | 370 | 370 |
Solve for the rate at which the net flows have zero present value: IRR = 13.2935%
Excel, net flows in B2:B11: =IRR(B2:B11)
TVPI = 934 ÷ 564 = 1.6560x
Every distribution and the residual move one year later; the calls do not. The net flows change in every year from 3 onwards, and the gain of 370 arrives on the same total but later. Recompute the IRR on the new column:
IRR, one year late = 10.4403%; TVPI = 934 ÷ 564 = 1.6560x, unchanged
Cost of the delay = 13.2935 − 10.4403 = 2.85 points
| Distribution timing | Net IRR | Change, points | TVPI | Peak capital out | DPI at Year 5 | PME at 7.1312% |
|---|---|---|---|---|---|---|
| One year earlier | 18.47% | +5.18 | 1.6560 | 263 | 0.7270 | 1.3353 |
| As scheduled | 13.29% | 0.00 | 1.6560 | 383 | 0.4574 | 1.2464 |
| Years 3 to 5 only, one year late | 12.12% | −1.17 | 1.6560 | 469 | 0.2039 | 1.2192 |
| All one year late | 10.44% | −2.85 | 1.6560 | 469 | 0.2039 | 1.1634 |
| All two years late | 8.61% | −4.68 | 1.6560 | 535 | 0.0514 | 1.0860 |
Four things stand out. The TVPI column never moves: a multiple has no clock and cannot see a delay. The IRR loss is not linear: the first year costs 2.85 points, the second 1.83, because the same multiple spread over a longer effective holding period gives up less rate with each additional year. Early distributions matter disproportionately: delaying only the 258 returned in Years 3 to 5 costs 1.17 points, two fifths of the full delay. And the public market equivalent, here with the index held at a constant 7.1312 per cent, falls by exactly the one-year index factor, 1 ÷ 1.071312 = 0.9334: the 1.2464 becomes 1.1634.
Run the other way, the same arithmetic explains why managers prize early exits and use subscription lines to delay calls: bringing every distribution forward a year lifts the IRR to 18.47 per cent on the same 1.6560x, and cuts the peak to 263. A high IRR on an ordinary multiple is often a statement about timing rather than about value created, and it is worth asking which of the two you are being shown.
The cash consequence is the one an allocation committee feels. On schedule, the most Thornbury ever had out was 383, in Year 4. One year late, the peak is 469; two years late, 535. That is 152 more of the 600 commitment tied up at once, with the distributions that were meant to fund later calls arriving after the calls. For an investor relying on distributions to pay its next commitments, the delay is a liquidity problem before it is a return problem.
To hold a 13.29 per cent IRR with every distribution a year late, the fund would have to return 1.1329 times as much: a TVPI of 1.8762x, 124.2 more on the same 564. A manager who holds assets an extra year is implicitly promising that much more value. Ask whether the extra year can deliver it.
The flows here are the fund's. What the investor earns on the whole commitment, including the uncalled part waiting in cash or an index, is lower again: see how much of the IRR reaches the investor. For the multiples themselves, see how to calculate TVPI, DPI and RVPI.
Shift the distributions, keep the calls, recompute the IRR and the cumulative peak. On Thornbury one year of delay costs 2.85 points of IRR and 86 more of peak capital; two years cost 4.68 points and lift the peak to 535, while the TVPI reads 1.6560x throughout. The free cash-flow engine workbook for this case runs the same timing experiments on your own schedule.
No. TVPI is total value divided by paid-in capital and ignores timing, so the illustrative fund reads 1.6560x whether its 934 comes back on schedule or two years late. Its IRR falls from 13.29 to 8.61 per cent over the same two-year delay, which is why the multiple should never be read without the rate.
IRR discounts each flow by the time it takes to arrive, and early cash both shortens the investment and reduces the capital outstanding. Delaying only the 258 the illustrative fund returned in Years 3 to 5 cuts its IRR by 1.17 points, about two fifths of the 2.85 points lost when every distribution is a year late.
Enough to restore the IRR on the later dates. For the illustrative fund, with every distribution a year late, the total returned would need to rise by a factor of 1.1329, from a 1.6560x to a 1.8762x TVPI, or 124.2 more on 564 paid in, just to stand still at 13.29 per cent.
This article is one calculation from Alternative Investments. 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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