Realized vs Unrealized Returns
Realized returns come from actual cash distributions; unrealized returns are based on the current valuation of remaining holdings.
Allocator relevance: Realized performance is higher-trust—unrealized can be mark-driven and is sensitive to valuation policy and market conditions.
Expanded Definition
In private markets, performance often includes a mix of realized and unrealized value. Unrealized returns depend on how holdings are marked (valuation policy, comparables, model assumptions). During market shifts, unrealized values can lag reality. Allocators track realized performance (DPI) as it reflects cash returned, while using TVPI to capture total value including residual marks.
Understanding this split is critical to avoid over-relying on paper gains.
How It Works in Practice
Managers report NAV (unrealized) and distributions (realized). Allocators monitor DPI, TVPI, and the ratio of realized to unrealized value as a maturity and quality signal.
Decision Authority and Governance
Governance includes valuation committees, audits, and LPAC oversight. Strong governance reduces mark inflation and ensures transparency about valuation methods.
Common Misconceptions
- Unrealized returns are “fake.”
- Realized returns are always superior (timing effects exist).
- A high TVPI guarantees future DPI.
Key Takeaways
- DPI is cash; TVPI is cash + marks.
- Mark discipline and valuation policy determine trust in unrealized value.
- Evaluate maturity and exit path to assess realizability.