Internal rate of return (IRR) meaning

A private equity fund is a collective investment arrangement. Created and overseen by private equity firms, these vehicles channel committed capital into privately owned companies—whose securities are not traded on public markets—by purchasing existing issued securities or subscribing for newly issued securities... Private equity firms What is a private equity firm? In essence, a private equity firm is a team of investment professionals that deploys and oversees money provided by external investors through funds the firm establishes for private equity transactions... Independent: Typically founded and owned by senior members of the firm, they manage multiple funds and raise capital from varied sources, including insurance companies, pension schemes and high net worth individuals... Captive: Usually housed within large institutions such as banks, insurers and pension funds, they invest capital supplied by the parent institution and may, at times, be allowed to secure funding from third parties... What is a private equity investment?

Internal rate of return (IRR) Internal rate of return (IRR) is the benchmark financial metric set by the British Private Equity & Venture Capital Association (BVCA) for judging private equity outcomes and making comparisons across investments. IRR seeks to identify the break-even rate for an investment while recognising the time value of money, and is typically described as the discount rate that, when applied to a sequence of projected cashflows from a specific investment, results in the net present value of anticipated cash inflows (eg investments or loans to an investee company) being equal to the net present value of anticipated cash outflows (eg dividends or interest from the investee company or exit proceeds)... The formula 0 = P0 + P1/(1+IRR) + P2/(1+IRR)^2 + P3/(1+IRR)^3 + ... + Pn/(1+IRR)^n, where P0, P1, ... Pn represent the cashflows in periods 1, 2, ... n, respectively...

Key issues for a private equity investor The structure of a private equity deal, and its terms and conditions, will differ in character and complexity according to the investment’s type and scale. Common priorities for a private equity backer typically include: enabling management to run the company while the investor retains full access to the management team, company records and other relevant information holding the option to assume control of the business’s management if required planning for a profitable exit—measured by internal rate of return (IRR) or investment multiple—usually within three to five years (see Practice Note: Private equity investment—firms and funds) In broad terms, these aims are delivered through thoughtful deal structuring and clear equity documentation setting out each party’s rights and obligations. From the outset, all parties should obtain tax advice on the proposed structure and investment, as even minor changes can significantly affect exposure to tax liability...