Internal Rate of Return (IRR) Methodology

Overview

Internal Rate of Return (IRR) is the primary performance metric for private capital funds. It represents the annualized effective compounded return rate that makes the net present value (NPV) of all cash flows equal to zero. For pooled calculations, any remaining unrealized value in the fund is treated as a distribution in the most recent reporting period.

Inclusion Criteria

To be included in pooled calculations, a fund must have: (i) at least one LP report within two years of the fund's vintage, and (ii) LP reports in at least 45% of applicable reporting periods. Returns are determined based on data from all LP reports in a given period. For periods lacking an LP report, straight-line interpolation is used (~10% of reporting periods).

IRR Formula

NPV = sum from t=0 to T of C_t / (1 + IRR)^t = 0

Where:
- C_t = net cash flow at time t
- T = total number of periods
- IRR = internal rate of return (solved iteratively)

Horizon IRR

Horizon IRR is a capital-weighted pooled calculation showing IRR performance for a specific time range. For example, one-year horizon IRR shows performance for a 12-month period, while three-year horizon IRR covers 36 months. This provides useful comparison across vintage years and strategies.

Data Extension Rules

Cash multiples and IRR are extended from previous quarters under these conditions: (i) After 5 years since inception if reported NAV < 5% of commitments. (ii) If NAV is unknown or >5% after 5 years, extend if fund is older than 8 years. (iii) For funds <5 years or <8 years with NAV >5%, extend from prior quarter if available.

Pooled Calculations

Pooled calculations combine cash flow data from groups of funds creating a capital-weighted IRR. All cash flows and NAVs are aggregated. For vintage-specific calculations, begin in Q1 of vintage year regardless of first capital call. Ending NAV treated as cash outflow in last reporting period.

Data Definitions