The question every LP asks about a predecessor fund during a fundraise, and the shortcut that says the portfolio could even fall in value and still get there.
Multiply the target net multiple by the paid-in capital the fund will have at the end of its life, gross the LPs' profit up for carried interest, and subtract what has already been distributed: what is left is what the remaining portfolio must sell for. In an illustrative $400m fund reporting 1.82x net, with 310 distributed and a 450 gross NAV, reaching 2.0x net needs 567.5 of exit proceeds, a 26.1 per cent uplift on today's NAV, or 8.0 per cent a year over three years. The common shortcut says the NAV could fall 1.8 per cent and still get there.
Worked in full in Private Equity Investor Relations by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
During a successor fundraise, every diligence call reaches the same question about the previous fund: what does the unrealised portfolio need to do for the fund to finish at its target? Investor relations has to answer it with a number, and the number has to survive an LP's analyst rebuilding it from the quarterly report. The calculation is short. It has two adjustments that the shortcut leaves out, and both work against the GP.
| Input | Value |
|---|---|
| Commitments | 400 |
| Invested in companies to date | 330 |
| Management fees and expenses called to date | 46 |
| Paid-in capital today | 376 |
| Fees and expenses still to be called | 14 |
| Paid-in capital at the end of the fund | 390 |
| Distributed to date | 310 |
| Gross NAV of the remaining portfolio | 450 |
| Carried interest, whole-fund waterfall | 20% |
| Target net TVPI | 2.0x |
No carry has been paid yet, because distributions are still below paid-in capital. The calculation assumes the preferred return and the GP catch-up are fully cleared at the target, so carry is 20 per cent of all profit; at the multiples in this article over a normal fund life that holds, but check it for a fund running late.
Gross total value is 310 + 450 = 760 on 376 of paid-in, 2.02x. Profit is 384, so accrued carry is 76.8 and the reported net TVPI is (760 − 76.8) ÷ 376 = 1.82x, with a DPI of 0.82x. That 1.82x is the figure in the quarterly report and the starting point for most LP questions.
LP total needed = target × final paid-in = 2.0 × 390 = 780.0
Gross proceeds needed = final paid-in + (LP total − final paid-in) ÷ (1 − carry) = 390 + 390 ÷ 0.80 = 877.5
Remaining value needed = gross proceeds − distributions = 877.5 − 310 = 567.5
Uplift on NAV = 567.5 ÷ 450 − 1 = 26.1 per cent. Annual growth over three years = (567.5 ÷ 450)1/3 − 1 = 8.0 per cent. In Excel, with target, final paid-in, carry, distributions and NAV in B1:B5: =(B2+(B1*B2-B2)/(1-B3)-B4)/B5-1.
The LPs need 390 of profit. With 20 per cent carry the fund must generate 487.5 of gross profit, a factor of 1.25, of which 97.5 goes to the GP. Of the 877.5 of total proceeds, 310 is already in the LPs' hands, so the portfolio still held must deliver 567.5.
If the portfolio is sold exactly at its 450 NAV, gross proceeds are 760 and the LPs receive 686.0 after carry, on 390 of final paid-in: 1.76x net, below the 1.82x reported today. The 14 of future fees are called without adding value. The fund is not standing still at 1.82x; holding the NAV flat moves it backwards.
Of the 117.5 of value the portfolio must add above NAV, future fees account for 31.5 once grossed up for carry: without them the remaining value needed would be 536.0, a 19.1 per cent uplift. Most of the rest is the grossing-up for the carry the GP earns on the way to the target.
| Target net TVPI | Remaining value needed | Uplift on NAV | Growth a year, 3 years |
|---|---|---|---|
| 1.8x | 470.0 | 4.4% | 1.5% |
| 2.0x | 567.5 | 26.1% | 8.0% |
| 2.2x | 665.0 | 47.8% | 13.9% |
| 2.5x | 811.2 | 80.3% | 21.7% |
Timing changes the growth rate, not the uplift. For 2.0x, the 26.1 per cent uplift is 12.3 per cent a year if the portfolio is sold within two years, 6.0 per cent over four and 4.7 per cent over five. A longer hold looks easier on these numbers and is harder in practice, because it usually brings more fee calls and a lower IRR.
The shortcut takes the target times today's paid-in and subtracts distributions: 2.0 × 376 − 310 = 442.0. Against a 450 NAV that says the portfolio can lose 1.8 per cent and the fund still reaches 2.0x. It leaves out both adjustments, the 14 of future fees and the carry the GP takes on the way, and it understates the required value by 125.5. Adding only the fees gives 470.0, the answer for a 1.8x target, not 2.0x. An LP that rebuilds the number properly and finds the GP's version 125.5 short will discount everything else in the presentation. The building blocks are in how to calculate TVPI, DPI and RVPI, and the gross-to-net gap they create is set out in why net IRR is lower than gross IRR.
State the path to target as the uplift the remaining portfolio needs, computed on final paid-in and grossed up for carry: 26.1 per cent on 450 of NAV here, 8.0 per cent a year over three years. Put it next to the portfolio's actual value creation plan, and say plainly that a flat NAV ends at 1.76x. Private Equity Investor Relations covers fundraising and LP reporting, and the free workbook for the book reads one fund's numbers end to end, from the realised floor to the full return.
Because management fees keep being called after the last valuation, adding to paid-in capital without adding value. In the illustrative fund, 14 of future fees take paid-in from 376 to 390, so a portfolio sold exactly at its 450 NAV finishes at 1.76x net, below the 1.82x reported today.
Divide the LPs' required profit by one minus the carry rate. For a 2.0x net target on 390 of paid-in, the LPs need 390 of profit; at 20 per cent carry with the hurdle and catch-up cleared, the fund needs 487.5 of gross profit, a factor of 1.25, so gross proceeds must reach 877.5.
Take the required uplift and annualise it over the expected time to exit. In the illustrative case the 450 NAV must become 567.5. Over three years that is 8.0 per cent a year; over two years 12.3 per cent; over five years 4.7 per cent, before any further fees the longer hold would bring.
This article is one calculation from Private Equity Investor Relations. 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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