Let's have a look at how we can calculate VC fund returns on an example fund.

We've got a lot of assumptions to have a look at first, but once we got through those, the calculations of the returns themselves are relatively straightforward.

So in terms of the assumptions, we've got 150 million to be invested.

We've got six investment companies that are the target investments with this 150 million.

And we're gonna be investing in two companies in year one, two companies in year two, and then the final two investment companies in our portfolio in year three.

And we're gonna assume that we're gonna be investing evenly in each of them.

So 50 million being invested each year. That's 25 into each individual company.

We've got a management fee of 2% and carried interest of 20%.

And if we go down through our companies, we're going to assume an exit point at year seven for four of our companies.

So we've got a seven year horizon we're looking at here, and we're gonna assume that by the end of year seven, four of these companies have an exit point.

We're going to get to the exit valuation based on an EBITDA valuation multiple.

And as a result, we've had to forecast the EBITDA of the companies over the next seven years to get to that EBITDA valuation.

At that point, we're also gonna assume that at the end of year seven, we do have two of our companies that haven't yet hit an exit point, but which we would have a valuation at that time for of 10 and 20 respectively.

So if we go down to the cash distributions that we'll receive as the fund at the end of year seven, we've got some sales, some IPOs in terms of the exit route, but we can get to the valuation at this point by taking the EBITDA at that point and multiplying it by the exit multiple valuation.

In total, we can see that portfolio company one, we've grown from 25 to 30, not great return for a venture capital fund, but portfolio company two's done amazing.

We've gone from a 25 investment to hit an exit point after seven years at 500 portfolio Company four has done all right.

But again, portfolio company three not quite as good, similar sort of range as portfolio company one, but it does mean that at the end of year seven, we will get 710 receipts into the fund from the underlying investments.

We've got a calculation in the management fee.

This is 2% of the committed capital, giving us 3 million for each of the seven years.

And our carried interest calculation, this is 20% of the gain made.

So the seven 10 return that we get, subtract from that, the one 50 invested capital to get our gain of 460, to which we apply a 20% carried interest waiting to get us the carried interest amount to be paid at the end of year seven.

When we hit that exit point for the first four companies, the carried interest will be 112.

So that's all of our underlying assumptions.

We can now go ahead and calculate the return numbers themselves.

So for our total value to paid in capital, we need to take all of the money that we've realized at the end of year seven.

That's 710.

We also have some unrealized investments, so they'll be part of our total value, that's the 10 and the 20 for the portfolio companies, five and six that haven't yet hit an exit point that will get our total value of 740.

Our paid in capital was one 50.

So as a result, our total value to paid in capital TVPI is gonna be the seven 10 plus the 30 all divided by the paid in capital to give us almost five times as the return that we get back.

The multiple on invested capital on the other hand, is a bit more about looking at the investment itself, not the returns that we're getting as the investor.

So we can look at this on a company by company basis because we're looking at the money invested into each of those underlying investments.

So in terms of our exit cash flows, we've got those four companies, one to four, let's just go and grab those.

And we also have the current unrealized valuations for companies five and six that haven't yet hit that exit point.

And if we add these all up, we will get back to the same number that we had for the valuation under the TVPI or cash on cash multiple.

The next thing we need to pick up here for the multiple and invested capital, it's how much money was invested into each of the underlying companies, which is gonna be the total amount invested of one 50 divided by the six investment companies that we've got to invest in.

And let's log onto each of those so we can copy it across to the right Now, we can see for each company, we take their valuation and divide it by their paid in capital amounts.

That formula's gonna work for the first four.

For the final two investments that haven't yet hit that exit point, we're going to need to slightly rework the formula to give us those lower multiples on invested capital.

That is not to be unexpected.

For companies that haven't yet hit an exit point to have a multiple on invested capital below one.

We can see though, for company two, they've got this fantastic multiple and invested capital of 20 times.

So if we add across and then calculate the multiple on invested capital for everything, that's the realized cash flows plus the unrealized valuation divided by the invested capital, we will get the same number for the multiple uninvested capital as we get for the TVPI.

This is because in this instance, all of the paid in capital from the LPs to the fund has been invested into underlying portfolio companies.

Final multiple method we've got to have a look at is the distributed to paid in or DPI multiple.

This is just a subsection of TVPI multiple in that we need to pick up the realized cash flows and the paid in capital.

And if we divide one by the other, we will get the distributed to paid in value.

This is telling us how much money has been returned to the investors already, which is telling us that they're getting back almost five times of the money that they've already invested. 4.73. The final calculation we're gonna pick up is to do with the IRR approach for the IRR. We need to look at the individual cash flows in each time period.

And if we do this on a gross basis to begin with, that is before any fees are paid out.

We can pick up the inflows, that's the distributions to us as the fund from row 41.

And if we copy that across, we can see that we get all of these 710 being paid to us in the final year.

The cash outflows, we need to go back up to the very top on row eight.

We're investing in these six companies over the first three years.

There are cash outflows.

So as a result, our cash position is gonna be the inflows minus the outflows across all of the seven years.

And then our IRR, we can just use the Excel function, the IRR function, select all of those seven years of cash flows, and that will give us a 35.6% IRR if we wanna transform this into the net IRR.

That means we need to take into account fees.

We need to just take the same cash flows as we had before for the gross cash flows, but incorporate our management fees.

The management fees are gonna be an outflow from the perspective of the investors in the fund, and we can copy that across for all seven years.

And then we also have the carried interest that is only paid on exits.

The carried interest is calculated 112 up there on row 52.

And again, I wanna make that negative as a cash outflow.

And then we can add up all of our cash flows for all seven years to get to the cash flows coming to the investors in the fund at the end of year seven of 595.

If we base our IRR on this number, the cash flows from the fund into the underlying investments, but also the management fees paid to the general partners as well as the carried interest at the end.

Our IRR will be lower at 29%.

The gross IRR is telling us the return has been generated by the fund based on its investments in the underlying companies.

The net IRR is the return to the investors in the fund, the limited partners, after they've paid the management fees and carried interest.