Glossary · Fund life

What is IRR?

IRR, internal rate of return, is the yearly return that accounts for when money goes into and comes out of a fund, so earlier payouts raise it.

In practice

Fund IRR is calculated from dated capital calls and distributions, plus remaining NAV, and is usually reported net of fees and carry. Gross IRR, which excludes them, is often confused with net. It is commonly paired with a multiple such as TVPI, which ignores timing. Early in a fund’s life, IRR is often distorted by the J-curve.

An example

Round numbers, not a real fund

Say $100 million becomes $200 million after five years: an IRR of about 15%. If it becomes $200 million in three years, IRR jumps to about 26%.

Why it matters

It rewards speed, which is why managers can lift it with early sales or fund borrowing.

A definition, not advice; where usage varies the entry says so. Something wrong? Tell the desk.

Related terms

TVPITVPI, total value to paid-in capital, adds the cash a fund has already returned to the value it still holds, then divides by the money investors paid in.
MOICMOIC, multiple on invested capital, is the total value an investment has returned or still holds, divided by the money put into it. It ignores how long that took.
DPIDPI, distributions to paid-in capital, divides the cash a fund has returned to investors by the cash they paid in. A DPI of 1.0x means they have their money back.
J-curveThe J-curve is the usual pattern where a fund’s reported returns dip below zero in its early years, because of fees and costs before investments mature, and then climb.
Subscription lineA subscription line is a short-term loan to a fund, backed by investors’ unfunded commitments, that lets the manager invest before calling investors’ cash.

The terms, in the news each morning.

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