Internal rate of return
IRR
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Money-weighted return that takes into account the size and timing of all cash flows – common for private equity and real estate.
The IRR is suitable for measuring returns from the perspective of the investor who decides on the timing and size of payments.
In practice
For private equity funds, the IRR is calculated from capital calls, distributions and the current net asset value. In practice, the family office records every cash flow with its date and currency, so that the IRR can be recalculated independently of the fund's own reporting. It is used together with the MOIC, because a high IRR over a short period can mean a small absolute gain.
Distinctions and common mistakes
The IRR is sensitive to timing: early distributions raise it even if the total gain is modest. A common mistake is to compare the IRRs of funds with very different durations or to ignore that interim IRRs depend heavily on the estimated net asset value.
Relevant in: EU-wide
Related terms
- Time-weighted return
- A return measure that neutralises the effect of contributions and withdrawals and thus measures the performance of the asset management.
- MOIC
- The ratio of current value plus distributions to invested capital – it shows how many times the capital has been multiplied.
Mentioned in these guides
- TWR or IRR? Which return a family office measuresTime-weighted return (TWR) and internal rate of return (IRR) compared: what each measures, when to use which, a worked example and the meaning for reporting.
- Benchmarks for family wealthWhich benchmark suits family wealth: composite indices, inflation targets, peer comparisons – and how to measure asset managers fairly against them.