IRR (Internal Rate of Return)

IRR is the annualized discount rate that sets the net present value of a series of cash flows to zero — the annualized, compounded return on invested capital. For a private equity deal with a single entry and exit, IRR solves Exit Equity = Entry Equity × (1 + IRR)^n, i.e., IRR = (MOIC)^(1/n) − 1.

IRR is time-sensitive: the same multiple of money earns a much higher IRR over a shorter hold. This is why sponsors like early dividends and quick exits — interim distributions pull cash flows forward and boost IRR even if they do not change total profit much.

Limitations to know: IRR assumes interim cash flows are reinvested at the IRR itself (often unrealistic), can be manipulated with subscription-line financing that delays capital calls, and can have multiple or no solutions when cash flows change sign more than once. That is why investors look at IRR and MOIC together.