FRIDAY | THE EXPLAINER
DPI: the three letters that are reshaping how private equity firms raise their next fund
Distributions to paid-in capital are no longer a back-page metric. In 2026, it is the single most important number that determines whether LPs will commit to a GP’s next fund. Here is what it means, why it has collapsed, and what it will take for it to recover.
Private equity has, for most of its history, been measured by a single headline number: IRR, or internal rate of return. IRR measures the annualised return on invested capital, and for decades it was the number that determined a GP’s reputation, its ability to raise successor funds, and the size of the carry its partners received. High IRR meant a successful fund. Low IRR meant a difficult fundraising conversation.
That is no longer the full story. In 2026, a different three-letter acronym has moved to the centre of LP attention. DPI, or distributions to paid-in capital, measures how much cash a fund has returned to investors relative to the capital they invested. A DPI of 1.0 means the fund has returned all invested capital. A DPI of 2.0 means it has returned twice what investors put in. A DPI below 1.0 means investors have not yet recovered their original capital.
Why has DPI displaced IRR as the primary lens through which LPs evaluate GPs? And why does it matter right now more than at any previous point in the industry’s recent history?
The IRR problem
IRR is calculated using the timing and size of cash flows: capital calls when the fund makes investments, and distributions when it exits them. It is sensitive to both the magnitude of returns and the speed at which they are generated. A fund that exits investments quickly can generate a very high IRR even if the total cash returned is modest in absolute terms, because the time-weighted calculation rewards speed as well as profitability.
The problem with IRR as the sole measure of success is that it can be very high even when the fund has returned very little actual cash. A fund that has invested capital in assets whose paper value has increased substantially, but has not yet sold any of those assets, will show a strong IRR based on the current valuation of the portfolio. But its DPI may still be near zero, because no distributions have been made. LP investors who have committed capital to this fund have received attractive quarterly valuations but have not received any actual money.
This dynamic has become acute in the current environment. The PE cohort raised between 2018 and 2022, deployed capital at high valuations using cheap debt, generated strong paper returns during the low-rate, high-multiple environment of 2020 and 2021, and then found exit markets closing in 2022 and 2023 as rates rose and IPO windows shut. The funds show attractive IRRs on paper. Their DPIs are near zero because the exits that would convert paper gains to cash have not happened.
The numbers behind the crisis
The McKinsey Global Private Markets Report data is unambiguous. DPI as a share of PE AUM fell to just 6% in the twelve months to June 2025, against a 2015-2019 historical average of 16%. Five-year rolling DPI hit its lowest recorded level. In plain terms: GPs are sitting on more unrealised value than at any previous point in the industry’s modern history, and they are returning cash to investors at roughly a third of the historical rate.
For LPs, this creates a compound problem. They receive distributions from their PE funds and use those distributions, in part, to fund new commitments to successor funds. If distributions have dried up, the source of capital for new fund commitments has also dried up. This is partly why PE fundraising hit a seven-year low of $414 billion in 2025, despite the industry managing more capital than ever before. It is also why the secondary market for LP stakes has boomed: LPs are selling fund positions not because they have lost faith in the underlying returns, but because they need the liquidity that distributions have failed to provide.
What recovery looks like
DPI recovery requires exits. Not paper gains, not quarterly valuation uplifts, but actual sales of portfolio companies at prices that generate cash distributions. The pipeline of those exits is the most important variable in private markets right now, which is why every improvement in the macro environment, every ceasefire, every tariff de-escalation, every recovering IPO window, is read through the lens of its likely effect on exit activity.
The TPG Asia OneHealthcare process is instructive here. If it closes at the top end of the valuation range, $7.6 billion against an original investment of approximately $1.2 billion, it would generate substantial distributions to TPG’s LP base across its relevant funds. That DPI would directly support TPG’s fundraising for its next Asia-focused fund, because LPs who have received meaningful cash back from a prior fund are far more likely to commit to the successor fund. This is the flywheel that the industry needs to restart.
The funds that will succeed in fundraising over the next three years are overwhelmingly those that can demonstrate credible DPI from their existing portfolios. Not paper gains. Not quarterly NAV increases. Actual distributions. The metric has shifted, and GPs who built their brands on IRR performance need to demonstrate that the underlying assets can actually be converted to cash at the valuations they have been carrying them at.
My take
DPI is the private equity equivalent of follow-through. IRR tells you how well you performed while the ball was in the air. DPI tells you whether it actually landed where you said it would. In a market where holding periods have stretched to five or six years, valuations have been marked up during benign rate environments and are now being tested against reality, and where LPs have been patient for longer than they expected, follow-through is the only thing that matters. Firms with exits are raising capital. The ones without them are not.
The good news is that the conditions for a DPI recovery are assembling. The Iran ceasefire removes one headwind. The IPO market has shown selective improvement. Strategic buyers are becoming more active. The secondary market provides an alternative exit route for assets that cannot access public markets. None of this is a quick fix, but the direction of travel is right. If H2 2026 delivers the exit activity that has been building in the pipeline, DPI will recover, fundraising will follow, and the cycle will have turned, as private equity cycles always eventually do.