What is IRR (Internal Rate of Return)?

Internal Rate of Return (IRR) is a metric used to evaluate the profitability of investments, particularly common in private equity, venture capital, and property development. It represents the annualized effective return rate that makes the net present value of all cash flows equal to zero.

Why IRR Matters: - Accounts for timing of cash flows (unlike simple returns) - Standard benchmark for PE/VC performance - Enables comparison across different investment durations - Reflects real compounding returns

Understanding IRR Context: IRR benchmarks vary by asset class, vintage year, and market conditions. Industry benchmarks are published by organisations like Cambridge Associates and Preqin. What constitutes acceptable performance depends on the specific strategy, risk level, and comparable investments. Always consider IRR alongside other metrics.

Important Considerations: - IRR can be manipulated by timing of capital calls/distributions - Short-term IRRs may not be sustainable long-term - Compare IRR with TVPI (Total Value to Paid-In) for fuller picture - Gross vs Net IRR (before/after fees and carry)

Target IRR in fund documents represents expectations, not guarantees. Historical IRR provides evidence of manager capability.