Question 1

What is IRR and how is it calculated?

Accepted Answer

Internal Rate of Return (IRR) is the annualized rate of return that makes the net present value of all cash flows (invested capital and distributions) equal to zero. In plain terms: it's the compound annual growth rate of your investment, accounting for the timing and size of all cash flows. A $1M investment that returns $2M over 5 years has an IRR of approximately 15%, but the exact figure depends on when distributions occur.

Question 2

How does IRR differ from cash-on-cash return?

Accepted Answer

Cash-on-cash return measures annual cash yield on equity — it's a simple ratio that ignores time value of money and doesn't include asset appreciation. IRR captures the full picture: all cash distributions during the hold period plus the equity from the sale, accounting for when each cash flow occurs. IRR is the preferred metric for comparing investments with different hold periods and cash flow timing.

Question 3

What is a good IRR by asset class?

Accepted Answer

Benchmarks vary by risk level. Real estate value-add: 12-18% net IRR is typically targeted. Real estate core/core-plus: 7-12%. Private equity buyouts: 20-25% gross IRR, 15-20% net to LPs. Venture capital: top-quartile funds target 25%+ net IRR. These are rough targets — actual returns vary widely by vintage year, manager, and market conditions. Always compare net IRR (after fees and carry) for LP comparisons.

Question 4

What is the difference between gross IRR and net IRR?

Accepted Answer

Gross IRR is calculated on deal-level returns before management fees and carried interest. Net IRR is what LPs actually receive after fees and carry are deducted. The difference between gross and net IRR reflects the cost of the fund structure — typically 3-7% annualized depending on fee levels and performance. LPs should always evaluate net IRR, not gross, when assessing fund performance.

Question 5

How do I compare MOIC and IRR together?

Accepted Answer

MOIC (Multiple on Invested Capital) shows how many times your money was returned — a 2x MOIC means you doubled your investment. IRR shows the annualized rate, which accounts for timing. A 2x MOIC over 2 years is a ~41% IRR; the same 2x over 7 years is a ~10% IRR. High MOIC with low IRR often indicates a very long hold. For LP presentations, show both: MOIC demonstrates scale of return, IRR shows efficiency.

IRR Comparison Chart

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FAQ: IRR Comparison Chart