Private equity (PE) firms operate in a high-stakes environment where performance isn’t just about making investments – it’s about maximising returns, managing risk, and ensuring long-term portfolio growth. While return on investment (ROI) is the most obvious measure of success, the most effective firms track a broad range of Key Performance Indicators (KPIs) to refine their strategies and optimise performance.

Monitoring the right KPIs helps PE firms assess fund performance, deal flow efficiency, portfolio value creation, and exit strategy effectiveness. Without data-driven insights, firms risk missing red flags and underutilising growth opportunities.

Internal Rate of Return (IRR) – The Core Performance Metric

IRR is a key measure of an investment’s profitability, reflecting the annualised rate of return earned on invested capital.

• Internal Rate of Return (IRR) = The discount rate at which the net present value (NPV) of all future cash flows (inflows and outflows) equals zero.
  A high IRR suggests strong investment performance, while a declining IRR signals potential issues in portfolio strategy, market conditions, or deal execution.

Multiple on Invested Capital (MOIC) – Evaluating Investment Efficiency

MOIC provides a simple way to measure how much value an investment has generated relative to the initial capital.

• MOIC = Total Realised + Unrealised Value / Total Invested Capital
  A MOIC above 2.0x typically indicates a strong investment, but the ideal multiple varies by strategy and investment horizon.

Cash-on-Cash Return – Measuring Liquidity and Cash Flow

While IRR considers time value, cash-on-cash return focuses on the immediate liquidity generated by investments.

• Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Initial Investment
  If cash flow returns are weak, it may indicate that portfolio companies need operational improvements to enhance profitability.

Holding Period – Balancing Returns and Exit Timing

The average holding period tracks how long investments are retained before being exited.

• Average Holding Period = Total Holding Years Across Portfolio / Number of Exited Investments
  If the holding period extends beyond industry norms, it could suggest delays in value creation, market challenges, or exit timing inefficiencies.

Exit Multiples – Maximising Sale Value

Exit multiples assess how well investments perform at the point of sale, typically measured as an EBITDA multiple.

• Exit Multiple = Exit Enterprise Value / Final EBITDA of the Portfolio Company
  If exit multiples are below industry benchmarks, it may indicate undervaluation or misaligned exit strategies.

Debt-to-Equity Ratio – Assessing Financial Leverage

Many private equity deals involve leverage. Tracking debt levels ensures financial stability and risk management.

• Debt-to-Equity Ratio = Total Debt of Portfolio Companies / Total Equity
  A high ratio signals aggressive financing, while a low ratio may suggest underutilised capital efficiency.

Revenue and EBITDA Growth – Portfolio Performance Indicators

Tracking revenue and EBITDA growth across portfolio companies ensures that investments are progressing toward higher valuations.

• Portfolio Revenue Growth Rate = [(Current Revenue – Initial Revenue) / Initial Revenue] x 100
• EBITDA Growth Rate = [(Current EBITDA – Initial EBITDA) / Initial EBITDA] x 100
  Strong growth indicates effective value creation strategies, while stagnant or negative trends suggest the need for operational improvements.

Fund Deployment Rate – Avoiding Capital Inefficiencies

A PE firm’s success depends on efficiently deploying capital. If cash sits idle, it weakens potential returns.

• Fund Deployment Rate = Capital Deployed / Total Available Capital
  A slow deployment rate may indicate a lack of attractive deals, while a rushed deployment could lead to poor investment choices.

Follow-On Investment Rate – Supporting Portfolio Companies

Some investments require additional capital to maximise value. Tracking follow-on investment rates helps balance risk and opportunity.

• Follow-On Investment Rate = Follow-On Investments / Total Investments
  A high rate suggests portfolio companies may need more capital than initially planned, which could impact fund liquidity.

Gross vs. Net IRR – The Real Returns After Fees

While gross IRR measures overall investment performance, net IRR reflects the actual returns to investors after fees and expenses.

• Gross IRR = IRR before deducting management fees and carried interest
• Net IRR = IRR after deducting all fees
  If the gap between gross and net IRR is too large, it may indicate high operational costs or an inefficient fee structure.