Internal Rate of Return (IRR)

IRR is the standard time-weighted-by-cash-flow return measure for private funds. It accounts for the timing and size of each capital call and distribution, plus the remaining NAV treated as a final cash flow. Because it is sensitive to timing, two investments with the same multiple can have very different IRRs.

Funds usually report gross IRR (before fees, expenses and carry, at investment level) and net IRR (after them, at LP level). IRR is commonly presented alongside multiples such as TVPI, DPI and MOIC, since IRR alone can be inflated by early distributions or by using subscription credit lines to delay capital calls.

Pitfalls include using the wrong cash flow dates, mixing gross and net flows, inconsistent treatment of recallable distributions, and presenting since-inception IRRs for very young funds, where the figure is volatile and not meaningful.

Example

An investor contributes $100 at the start and receives $150 three years later. IRR = (150 ÷ 100)^(1/3) − 1 ≈ 14.5% per year. If the same $150 were received after five years, IRR ≈ 8.4%, even though the multiple is still 1.5x.