IN TODAY'S EDITION OF SYDELETTER

• What’s Happening: Understanding Distributions to Paid-In Capital
• Upcoming Webinar: Standing Out as an Emerging Manager – The Pitch
• ICYMI: Sydecar’s Series A Announcement
• Quarterly Product Update: Q4’24

WHAT'S HAPPENING

As an emerging fund manager, understanding distributions to paid-in capital (DPI) is essential for measuring performance and communicating effectively with LPs. DPI offers a tangible view of how well a fund returns capital relative to the total amount invested, making it an important metric for assessing fund liquidity and realized returns. 

What is DPI?

DPI measures the capital returned to investors compared to the total capital they contributed to a fund. Calculated as:

A DPI greater than 1 indicates that the fund has returned more to LPs than was invested, showcasing positive returns. For example, a DPI of 1.4 means LPs have received $1.40 for every dollar they invested. Conversely, a DPI below 1 suggests that the fund has yet to distribute all the capital invested, often due to unrealized gains or the fund being in its earlier stages.

Why DPI Matters to LPs

For LPs, DPI is a reliable measure of:

• Liquidity: It indicates how effectively a fund is generating cash returns.
• Performance: As a cash-based metric, DPI accounts for actual distributions, providing a clear picture of realized returns.

However, DPI has its limitations:

• Short-term focus: A fund may have a high DPI because they pursued strategies that could lead to earlier exits, such as investing in later-stage companies with shorter timelines to liquidity or selling positions on the secondary market, potentially sacrificing higher long-term returns.
• Exclusion of unrealized value: DPI does not consider the potential future appreciation of remaining portfolio investments.
• Stage-blind metric: The DPI formula treats distributions from early- and late-stage investments equally, even though early-stage investments often require a longer timeline to mature.

Albert Azout, Managing Partner at Level Ventures, believes that smaller funds are more likely to generate higher DPI: “We believe DPI will be king, given the paucity of liquidity over the last few years. As such, smaller funds have the potential to deliver DPI faster and benefit from exits in the middle of the curve.” 

Avoiding DPI Misinterpretation and Manipulation

While DPI is a vital metric, it can be misleading if not considered in context. As a fund manager, be aware of these potential pitfalls:

• Timing Distributions: Inflating DPI by timing distributions to prioritize short-term gains may create a misleading impression of fund performance.
• Selective Reporting: Highlighting only successful investments while excluding underperforming ones can artificially elevate your DPI, but this approach can create mistrust with LPs and damage your credibility over time.
• Single Events: Relying on a single distribution event, such as a significant exit, can boost DPI temporarily but may not reflect the fund’s overall health or sustainability.

To present a clearer and more accurate picture of your fund’s performance:

• Provide a complete distribution history: Go beyond headline numbers to showcase the full scope of your fund’s realized distributions, including all investments.
• Differentiate between gross and net DPI: Gross DPI measures total distributions to LPs without accounting for expenses or fees, while net DPI accounts for management fees, carried interest, and other costs, providing a more realistic view of LP returns. Share both figures to demonstrate transparency and highlight the impact of fees and expenses on returns.
• Articulate long-term strategy: Frame your DPI within the context of your fund’s broader investment thesis and timelines, helping LPs understand how current distributions align with future goals.

DPI is a cornerstone metric for evaluating fund performance, but it’s important to understand its nuances and limitations. By taking practical steps to improve your fund’s DPI, you can confidently communicate your value to LPs and achieve better outcomes for your fund.

Sources

• BIP Ventures
• Forbes

Upcoming Webinar: Standing Out as an Emerging Manager – The Pitch

Fundraising as a General Partner is more competitive than ever, making it essential to differentiate yourself from the crowd. In our upcoming Sydecar Session, you'll learn what LPs look for in a pitch and how to stand out with and beyond the slide deck.

Our panelists include Jamie Rhode, Partner at Screendoor, and Benedikt Langer, founder of Embracing Emergence and seasoned investor with experience in VC and private lending. Join us on Wednesday, February 19th at 3P ET as we discuss positioning your unique edge, building a compelling personal brand, crafting meaningful updates, and leveraging your network effectively. Whether you're actively raising funds or preparing for the future, this webinar will provide you with practical tools to leave a lasting impression. Sign up today: 

ICYMI: Sydecar's Series A Announcement

We couldn’t be more excited to announce our Series A, led by Deciens Capital and supported by Pipeline Capital Partners and Runa Capital. We are so grateful to our customers, partners, investors, and team members for getting us to this milestone and trusting us to build the infrastructure that powers private markets.

This additional funding will provide us with more opportunities to create value for our customers and community. We’re investing in tools and features that will streamline workflows, support complex transactions, and lead to stronger connections across the ecosystem. And we’re just getting started. Read more about our Series A funding round and what’s next for Sydecar here:

Quarterly Product Update: Q4’24

We’re kicking off 2025 with product updates designed to improve the investing experience for deal leads and LPs alike. Here’s a quick look at what’s new:

✅ Unlimited Investor Invitations

✅ Investor Compliance Automation

✅ Target Company Sanctions Screening

✅ Fund+ Improvements

Read the full post on our blog and see how these updates can streamline your investment processes: