Is IRR the best measure for private equity performance. Why?
yes, according to GIPS. i know that it’s better than using multiples of invested capital since multiple ignore the time value of money. my question is why is IRR method better than NPV method?
That is stated in CFAI text - I’m also puzzled.
i thought the IRR method was exactly the same as the NPV method, aka venture capital method?? You’re just simply reversing the order of how you’re calculating the value…or are you guys referring to something else…i have target IRR in my notes, but I don’t think this relates to what you’re referring to: Target IRR – most LBO funds identify a target IRR for their investment. This target IRR reflects both the average risk of their investments and prevailing market conditions. Generally, the target IRR, which is used as a “hurdle rate” within the fund, equals or exceeds the rate of return that the fund managers originally used in the marketing the fund to investors. In any event, hopefully we can get this resolved…
maybe it’s because the IRR method puts everyone on the same playing field from a marketing perspective. if you’re a PE fund manager, and you’re out trying to raise money from LP’s, you don’t say, we’ve averaged NPV’s of $500,000, because each LP has a different investment amount. it would definitely make sense to talk about things in terms of an IRR.
All I know is that every PE fund I’ve ever worked with at my job reports performance using IRR, so I’m not questing CFAI on this one. That said, if someone smarter than me could justify this, I’d be interested.