Decoding Private Equity Metrics for Founders

• Private equity performance metrics help MSME founders measure investor expectations, value creation, and exit potential beyond just funding numbers.
• Key metrics like IRR, TVPI, DPI, and RVPI show the speed of returns, total value created, actual cash realized, and future upside.
• Look beyond financial returns: PE firms also evaluate gross margins, capital efficiency, cash cycles, CLV, and revenue growth consistency.
• Use benchmarks like PME to compare PE performance against the public markets and identify red flags early.
• S45 helps MSMEs understand these metrics, track growth performance, and build investor-ready businesses focused on sustainable value.

Disclaimer: This content is for educational purposes only and should not be considered as financial advice. Every business situation is unique, and we recommend consulting with qualified financial advisors before making important business decisions.

When a private equity firm approaches an MSME founder with a funding offer and promises 3x returns, do you know what that really means? Indian entrepreneurs and MSME business owners face this scenario more often today. The promise sounds exciting, but the uncertainty is always in the details. 

The problem is simple. Most founders look at the return multiple and not the indicator behind it. That creates confusion, pressure, and sometimes wrong decisions. The fear of dilution or losing control creeps in because the performance language feels unclear and designed for institutional finance rather than real businesses.

Once you understand the fundamentals behind the performance metrics, evaluating a PE offer becomes objective instead of emotional. In this blog, we will break down the key performance metrics in private equity and show you how they relate to the growth and legacy of your MSME.

Before we get into the individual numbers, there is one more thing every founder needs to understand. Private equity performance is measured in two broad categories. These categories shape how investors think about value creation and risk. When you understand this framework, you can read any funding proposal with clarity.

There are two core categories:

Absolute vs Relative metrics

• Absolute shows the final outcome. How much value or return was created?
• Relative compares your performance with a benchmark or the broader market.
• If you only look at absolute returns, you miss the competitive context.

Time weighted vs Money weighted metrics

• Time weighted shows growth without considering when capital was invested.
• Money-weighted accounts for the timing of cash flows. This is where IRR fits in.
• It helps answer a simple question. How efficiently was capital deployed?

Why does this matter for MSMEs? These categories help you filter genuine performance from marketing. You start comparing offers based on value creation instead of just valuation.

Now that you have the foundation, let’s break down the most important performance metrics private equity firms use and how they impact the growth journey of your business.

Most MSME founders evaluate investors only based on valuation or funding amount. Private equity firms think differently. They measure performance based on value creation, liquidity, and future potential. These metrics decide how they price your business, what growth they expect, and how long they plan to stay invested.

These are the five performance metrics that matter most in real PE deals and why they significantly impact your scale-up journey.

1. IRR (Internal Rate of Return): The Speed of Returns

IRR measures how fast an investment grows every year after adjusting for the timing and size of the cash flows.

What it really means for founders:

• IRR tells investors whether the growth of your business justifies the risk they take.
• Faster growth and faster cash flows increase IRR.
• Slow growth or delayed profitability decreases IRR.

Strategic interpretation:

• PE doesn’t just want growth; they want efficient growth.
• An investor targeting 18 percent IRR expects more than revenue. They want:

1. Margin expansion

2. Cash flow discipline

3. Predictable growth cycles

For example, if an investor puts ₹10 crore expecting 20 percent IRR, they want your business to scale to around ₹25 crore in 5 years.

LIRR can be boosted with timing tricks. That’s why serious investors use TVPI and DPI along with IRR.

2. TVPI (Total Value to Paid In Capital): Total Value Multiple

TVPI shows your business’s total value creation on the money invested.

Formula: TVPI = (Distributions + Residised Value) ÷ Paid-in Capital

What TVPI reveals:

• Total return generated so far
• Value that’s already realised plus future value still in the business

Why PE loves TVPI:

• It gives a complete picture of performance
• It reflects both potential and realised returns

Practical example: 

If a PE firm invested ₹5 crore, collected ₹5 crore in distributions and the remaining ownership is worth ₹10 crore: TVPI = (5 + 10) ÷ 5 = 3.0x TVPI

A 3x TVPI means every rupee invested has created ₹3 in value. This becomes a strong signal of sustainable value creation.

3. DPI (Distributed to Paid In Capital): Real Cash Returned

DPI shows how much cash investors have already taken out.

Why DPI matters more than founders realise:

• It is not a projection. It is actual cash returned.
• It indicates the maturity of the fund.
• It’s a leading signal of exits and liquidity.

What founders should read between the lines:

• Low DPI is common in early years. Most capital is still working.
• DPI ramping up usually means:

1. Exit planning

2. M&A conversations

3. IPO discussions

4. Partial buyouts

Rules of thumb:

• Early-stage: 0.2x to 0.5x DPI is normal
• Late-stage: 1.5x or higher shows strong realised performance

DPI is a strong predictor of founder liquidity events. It is the metric that affects your personal wealth.

4. RVPI (Residual Value to Paid In Capital): Future Upside

RVPI captures the unrealised value that still sits inside the company.

What RVPI signals:

• The future scale and exit potential.
• Whether the company still has headroom to grow.

Pattern you should understand:

• High RVPI early in the investment cycle
• Low RVPI late in the cycle as the business matures and value gets distributed

This metric tells you how much potential the investor believes is left in your story.

5. Modified IRR (MIRR): A More Realistic Performance Measure

MIRR uses a realistic reinvestment rate instead of assuming capital grows at the same rate forever. PE investors look at MIRR when comparing strategies, deal structures, and timelines.

Why MIRR helps founders:

• It prevents inflated IRR claims
• It reflects actual capital cost and exit assumptions
• It helps compare funds fairly

If two PE firms show similar IRR, but one shows a higher MIRR, the investor likely uses more predictable cash flow assumptions.

Quick Comparison:

These performance indicators explain how investors value you, how they expect your business to grow, what exit plan is realistic, and how much wealth you, as a founder, can create.

If you are unsure how to evaluate these numbers in a real deal, this is where S45 can support you. We simplify the financial language and help you assess PE offers based on growth, strategic fit, and long-term potential. You get clarity on the deal and confidence in your decisions.

Up next, we will talk about something most founders get worried about when they work with private equity: why performance can look negative in the early years and why that phase is crucial for long-term scale.

Many MSME founders assume that once PE capital enters the business, returns should rise immediately. In private equity, the early phase usually shows negative or flat performance. This isn’t a failure. It is the standard growth pattern called the J Curve.

Why the early dip happens:

• Capital flows into expansion and capability building
• Revenue takes time to convert into cash
• Working capital rises before profitability improves

As the business scales:

• Margins expand
• Operations become efficient
• Valuation rises faster than costs

Typical cycle:

• First 2 to 3 years: negative or low returns
• Later years: sharp upward growth

What this means for MSMEs:

• Early metrics don’t reflect long-term value
• PE evaluates based on the projected curve, not month-to-month performance

Next, let’s look at the operational numbers PE firms track to judge future growth and business health.

Private equity firms do not evaluate success based only on IRR or TVPI. They also track operational signals to understand whether a business can scale sustainably. These indicators reveal the strength of your model, customer demand, efficiency, and market resilience. If these metrics are improving, valuation and financial returns eventually follow.

Here are the five operational metrics every MSME founder should be aware of.

1. Gross Margin Stability

Formula:

What PE firms look for:

• Consistent margins over several quarters
• The ability to retain margin during growth and market pressure
• Pricing discipline and strong unit economics

Target ranges:

• Manufacturing: 25 to 35 percent
• Software and recurring models: 70 to 80 percent

For MSMEs, strong margins show operational control and pricing power.

2. Capital Intensity Ratio

Formula: 

What it shows: How efficiently your business converts investments into output

How to improve:

• Optimise inventory
• Outsource non-core functions
• Deploy capital only where it accelerates growth

A lower ratio signals that you need heavy assets to grow. A higher ratio indicates scalable economics.

3. Cash Conversion Cycle

Formula:

Why it matters: Shorter cycle = stronger liquidity and faster growth

In the Indian MSME context:

• Long receivable cycles are common
• PE expects consistent improvement quarter over quarter

A shorter cycle frees up capital for growth instead of locking it in operations.

4. Customer Lifetime Value

Formula: 

Why PE cares about CLV:

• Shows repeatability and customer trust
• Supports premium pricing
• Justifies growth spending

High CLV is a signal of market fit and customer stickiness.

5. Revenue Growth Rate

Formula:

What PE firms expect:

• Consistent year-over-year revenue increases
• A clear trajectory of compounding growth
• Growth that’s in the 25–40% range for growth-stage investment (not a must, but a strong signal)
• Minimal volatility in topline performance

Consistency matters more than spikes. Sustainable growth builds valuation.

These metrics tell investors how fast you can scale, how defensible your business model is, and whether revenue growth will translate into cash and valuation. They also help you make better operational decisions, even before funding enters the business.

Most MSMEs track revenue and profit, but not these deeper indicators. This is where S45 guides founders. We help you build systems for operational and financial metrics, and identify the gaps that hold back scale. Instead of reacting to investor questions, you walk in prepared and in control.

Up next, we’ll look at how to compare PE performance against the broader market and evaluate whether a funding partner is truly outperforming or just presenting attractive numbers.

Most founders treat PE selection like a funding decision. In reality, it is a performance evaluation. The question isn’t just who will invest. It is those who will help the business grow faster than the market.

Start by comparing the PE firm’s track record and portfolio outcomes. Look for patterns of value creation. A strong PE partner should outperform industry benchmarks, not match them.

Key signals to benchmark against:

• Portfolio exit multiples: Did they improve enterprise value or just maintain it?
• Average revenue growth across portfolio: Are they consistently driving growth above market average?
• Real operational support: Not boardroom advice. Actual contribution in hiring, strategy, pricing, and expansion.
• Sector specialization: Firms that work with MSMEs and family-run enterprises understand operational constraints better.
• Retention of founders: If previous founders stayed longer, it indicates alignment and support.

Why this matters: a misaligned PE partner adds pressure, not growth. A firm with proven performance gives your business leverage, stability, and a higher valuation.

Up next, we’ll break down the red flags you need to watch for. 

Even the strongest PE firms come with tradeoffs. Many MSMEs look at the capital and overlook the conditions attached to it. A growth partner is supposed to strengthen your business, not create dependency or disrupt stability. Identifying red flags early helps you avoid valuation erosion, loss of decision-making, and misalignment on strategy.

Common warning signs to pay attention to:

• One size fits all investment thesis: If they use the same playbook for every company, growth will suffer. MSMEs need operational adaptability.
• Aggressive cost-cutting as a primary strategy: Reducing headcount and marketing looks good in the short term, but hurts long-term revenue building.
• Heavy dependence on debt: PE firms that overleverage the business take control without increasing capability. This raises your downside risk.
• Short exit horizon pressure: If they push for a quick flip, decisions will favor valuation bumping and not business durability.
• Misalignment on growth priorities: When the investor focuses on scaling before building operational foundations.
• Situational limitations you should evaluate:
• Is their governance model compatible with your stage?
• Do they understand MSME operational constraints and family-owned structures?
• Have they built repeatable success in your sector?

A PE partnership should upgrade your strategic clarity and capability. Not drain resources or limit autonomy.

Partner with Expertise: How S45 Supports MSME Founders?

Private equity is not just about capital. It is about choosing partners who match your business fundamentals, growth philosophy, and long-term priorities. When MSME leaders understand how PE firms evaluate performance and what signals matter, they negotiate with clarity and strength instead of uncertainty.

At S45, we believe MSME founders deserve both capital and expertise. Our team helps you understand these metrics, implement tracking systems, and build partnerships that create lasting value, not just quick exits.

We support MSMEs through:

• Business and operational strategy guidance
• Funding and partnership preparation
• Financial and performance metric readiness
• Growth planning and valuation clarity

You do not have to approach PE discussions alone or guess the rules. With the right preparation and the right partner, your business becomes investor-ready on your own terms. Connect with us now!