![]() Part of an investment’s IRR comes from the cash flow that the business was expected to generate without any improvements after acquisition. This can give investors in private-equity funds a deeper understanding when making general-partner investment decisions.īaseline return. Armed with those insights, investors are better able to compare funds more meaningfully than by merely looking at the bottom line.Īlthough IRR is the single most important performance benchmark for private-equity investments, disaggregating it and examining the factors above can provide an additional level of insight into the sources of performance. What sometimes escapes scrutiny is how much of their performance is due to each of the factors that contribute to IRR above a baseline of what a business would generate without any improvements-including business performance and strategic repositioning but also debt and leveraging. ![]() Since the headline performance of private equity, for example, is typically measured by the IRR of different funds, it’s instructive to examine those funds’ performance. Disaggregating what actually propels them can help managers better assess a project’s genuine value in light of its risk as well as its returns-and shape more realistic expectations among investors. As a result, multiple projects can have the same IRRs for very different reasons. In addition to the portion of the metric that reflects momentum in the markets or the strength of the economy, other factors-including a project’s strategic positioning, its business performance, and its level of debt and leverage-also contribute to its IRR. ![]() They’re a complex mix of components that can affect both a project’s value and its comparability to other projects. Projects with the highest IRRs are considered the most attractive and are given a higher priority.īut not all IRRs are created equal. Private-equity firms and oil and gas companies, among others, commonly use it as a shorthand benchmark to compare the relative attractiveness of diverse investments. Executives, analysts, and investors often rely on internal-rate-of-return (IRR) calculations as one measure of a project’s yield.
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