Internal rate of return

Measure the annualised return implied by the amount and timing of investment cash flows, using a fully reconciled cash-flow series.

Quick answer

Internal rate of return, or IRR, is the discount rate that makes the net present value of a series of cash flows equal to zero. In private equity it is used to express a time-sensitive annualised return from contributions, follow-on investments, distributions and, where stated, remaining value.

Use the worked example

Meaning and transaction use

An SEC filing defines IRR as the discount rate that makes the net present value of a cash-flow series equal to zero. [S1]

Another SEC filing describes portfolio-company IRR as an annualised return that reflects the amount and timing of initial, follow-on and disposal cash flows. [S2]

Proposed control method: reconcile every dated cash flow and the reporting basis before comparing IRR with MOIC or a hurdle.

Worked example

Illustrative annual-period case only. Assume an initial investment of 40.0 million and a single 60.0 million exit receipt two years later.

Scroll the table horizontally to view all columns.

Measure	Calculation	Result
Initial investment	At year 0	-40.0m
Exit receipt	At year 2	+60.0m
Two-year value multiple	60.0 / 40.0	1.50x
Illustrative annual IRR	Square root of 1.50 - 1	22.5%

The simplified two-year IRR is approximately 22.5%. Different cash-flow dates require date-based calculation.

Proposed transaction review process

Define the basis

Set gross or net, realised or total, currency and reporting date.

Reconcile cash flows

Tie every contribution, distribution, fee and value to evidence.

Calculate by date

Use actual dates and an approved date-based return function.

Interpret with context

Review MOIC, duration, unrealised share and sensitivity alongside IRR.

Evidence checklist

Contributions

Funding notices, bank records and investment ledger.

Distributions

Sale proceeds, dividends, repayments and bank evidence.

Residual value

Valuation model, policy, market inputs and approval.

Adjustments

Fees, expenses, carry, tax, foreign exchange and ownership changes.

Decision framework

Situation	Proposed action
Cash flows are irregular	Use actual dates and retain the dated schedule.
Value is largely unrealised	Show realised returns and valuation sensitivity separately.
Gross and net IRR differ	Reconcile fees, expenses and carried interest.
IRR and MOIC rank cases differently	Assess both return magnitude and timing.

Common errors to check

Annualising a simple total return without timing.
Omitting follow-on capital.
Mixing gross and net cash flows.
Reporting an unrealised IRR without valuation qualification.

Reconcile the return calculation

Bring the dated investment ledger, distributions and valuation support to a return review. Reconcile IRR, MOIC and the gross-to-net bridge.

Discuss the transaction

Primary references and editorial scope

SEC filing: IRR definition
Definition of IRR as the discount rate that sets cash-flow net present value to zero. Reference checked 17 September 2026.
SEC filing: Portfolio-company IRR basis
Example annualised return using initial, follow-on and disposal cash flows. Reference checked 17 September 2026.

Editorial qualification

General transaction education using public United States filings. Figures are hypothetical. IRR depends on the stated cash-flow basis, dates, valuation policy and calculation method.

General business information. Obtain advice appropriate to the legal, tax, accounting and financing facts. No offer, lender commitment or transaction outcome is represented. All worked examples use expressly assumed figures. Editorial draft date: 17 September 2026.