TVPI stands for Total Value divided by Paid-In Capital. The numerator, Total Value, can be calculated as Distributions + Net Asset Value. This represents the total value that the investors are receiving. Distributions include any dividends that may occur throughout the holding period, such as a dividend recapitalization. Net Asset Value represents the total equity value of the firm. In other words, it is the estimated market value of the equity value, similar to market capitalization except from a private company’s perspective. By adding the dividends / distributions received and the estimated equity value of the company, we can calculate the total value equity investors are receiving from their investment.
The denominator, Paid-In Capital, represents the amount of equity capital invested. This equity capital is typically invested mostly by private equity investors and partially by management. It does not include capital raised through debt as it is focused only on equity investment.
By comparing what value investors are receiving relative to their original equity investment, we can get a general sense of how profitable a private equity investment will be.