How to measure investment fund performance: VC & PE metrics explained

Author:

The Carta Team

|

Read time:

6 minutes

Published date:

June 27, 2025

Learn how to measure investment fund performance. Explore key metrics for VC and PE funds—including IRR, MOIC, and ESG integration—for smarter investing.

What is fund performance?

Fund performance refers to how effectively a private fund grows and returns capital to its investors over time. VC and PE firms use a variety of different metrics (such as IRR, MOIC, TVPI, and DPI) to measure fund performance as comprehensively as possible. This information is usually summarized in a document called a tear sheet, which fund managers send to their LPs on a quarterly or monthly basis.

Why is performance measurement crucial for VC and PE funds?

In the private markets, performance measurement is vital for capital allocation, investment strategy, and building LP confidence. Accurate performance data helps fund managers identify strengths, address weaknesses, and benchmark against other funds to assess how their investments are performing relative to the market. It can also inform strategic decisions on reinvestment, follow-on funding, and portfolio rebalancing.

Key metrics for investment fund performance

Internal rate of return (IRR)

IRR is a way of measuring the expected rate of return on an investment over time. In more technical terms, it is the annualized effective compounded return rate that makes the net present value (NPV) of all cash flows (both inflows and outflows) from a fund equal to zero.

• Strengths: IRR accounts for the timing and magnitude of cash flows, making it a dynamic measure of fund performance.
• Limitations: IRR can be distorted by early company exits or delayed cash flows, and may not always reflect the true economic value—especially in young funds.

A higher IRR generally indicates better fund performance, but it should be interpreted alongside other metrics and in the context of the fund’s lifecycle and strategy. In venture capital, LPs typically expect a fund’s net IRR to reach at least 20% by the time it has exited all of its investments. Other asset classes (such as public equities, private equity, and real estate) have differing IRR expectations.

Multiple on invested capital (MOIC)

MOIC is the ratio of the total value (realized and unrealized) returned to investors divided by the total capital invested. It provides a straightforward view of how much value a fund has created per dollar invested.

Generally, MOIC is used across private asset classes as a gross metric, excluding fund management fees and carried interest. Some funds may report net MOIC, which includes fees and carry in the final calculation.

Total value to paid-in (TVPI)

TVPI combines both realized returns (i.e. distributions) and unrealized value (a fund’s remaining portfolio) relative to the capital paid in by LPs. It’s a holistic measure of a fund’s total performance at any point in its lifecycle.

Distributions to paid-in (DPI)

DPI measures the amount of capital returned to LPs as a proportion of their invested capital. It’s a key indicator of liquidity and the fund’s ability to generate cash returns.

Residual value to paid-in (RVPI)

RVPI is the ratio of the current value of remaining portfolio investments to the total capital paid in by LPs. It reflects the unrealized portion of a fund’s value, showing how much of the original investment is still held in active investments.

Net asset value (NAV)

NAV represents the current market value of a fund’s holdings, minus any outstanding liabilities. It provides a snapshot of the fund’s value at a specific point in time, which is useful for interim reporting and portfolio monitoring.

Environmental, Social, and Governance (ESG) metrics

ESG metrics—such as carbon footprint, diversity, and governance practices—are increasingly used to assess the broader impact and sustainability of investments. LPs and regulators are demanding more transparency on ESG outcomes. Funds now track ESG-related KPIs alongside financial metrics, including them in annual reviews and impact reports.

Comparing performance across fund stages

The J-curve effect

The J-curve describes the typical trajectory of fund returns: Negative or low returns in the early years followed by accelerated gains as investments mature and exits occur.

There are several reasons why the J-curve occurs:

• Upfront costs: At the outset, funds incur management fees, organizational expenses, and make initial investments that may not immediately generate returns.
• Investment maturation: Early investments often take years to develop, with value creation and exits (such as IPOs or acquisitions) typically occurring later in the fund’s lifecycle.
• Delayed realizations: Distributions to LPs are usually back-loaded, as portfolio companies need time to grow and reach liquidity events.

How to track investment performance over the fund lifecycle

Funds in the early stages of investing emphasize capital deployment, initial valuations, and qualitative milestones. Towards the middle stages, monitor portfolio growth, follow-on investments, and interim valuations. As funds reach the late stages of investing, focus on analyzing realized returns, distributions, and cash flow.

Challenges in measuring fund performance

Common challenges:

• Illiquidity: Private investments are not easily tradable, complicating valuation and performance tracking.
• Valuation uncertainty: Determining fair value for private assets can be subjective and varies by methodology.
• Timing of cash flows: Irregular cash flows make it harder to compare performance across funds.

How fund managers can confront these challenges:

• Adopt standardized valuation practices and use third-party audits for data integrity.
• Communicate transparently with LPs about assumptions and methodologies.
• Leverage modern fund management platforms to automate data collection, calculations, and reporting, reducing errors and increasing transparency.
• Use advanced analytics tools for real-time portfolio assessment, scenario modeling, and benchmarking, empowering funds to make data-driven decisions and provide LPs with up-to-date insights.

Best practices for fund performance reporting

What LPs expect in fund performance reports:

• Consistent, timely, and transparent updates.
• Clear explanations of key metrics and methodologies.
• Disclosure of risks, assumptions, and market context.

How to build trust when reporting to LPs:

• Use standardized templates and reporting frameworks.
• Leverage technology for real-time and secure data sharing.
• Foster open dialogue and respond proactively to LP questions.

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