Definition
Internal Rate of Return (IRR)
IRR is the annualised, time-weighted return on an investment that accounts for the timing of cash flows.
IRR is the discount rate at which the net present value of all cash flows (money in and money out) equals zero. PE and VC funds report IRR because it captures not just how much was made but how quickly — an early return boosts IRR even if the total multiple is modest.
IRR can be misleading on its own: a high IRR on a tiny, fast deal may matter less than a lower IRR on a large, long one. That is why funds report it alongside multiple-based measures like MOIC and DPI.
Related terms
- MOICMOIC (Multiple on Invested Capital) measures how many times an investor's money has grown, regardless of how long it took.
- TVPITVPI (Total Value to Paid-In) is the ratio of a fund's total value — realised distributions plus remaining holdings — to the capital LPs have paid in.
- DPIDPI (Distributions to Paid-In) measures how much cash a fund has actually returned to its investors relative to the capital they paid in.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.