IRR
Internal Rate of Return
Time-weighted return on a series of cash flows. For irregular fund cash flows, use XIRR. The standard headline metric for AIF performance.
Internal Rate of Return (IRR) is the discount rate at which the net present value (NPV) of all cash flows in and out of an investment equals zero. It is the standard headline measure of fund performance because it accounts for the timing of cash flows — a multiple that arrives in year 2 is worth more than the same multiple in year 8.
Formula:
`0 = Σ CF_t / (1 + IRR)^t`
where CF_t is the net cash flow in period t (capital calls are negative, distributions are positive).
XIRR for irregular cash flows:
Real fund cash flows arrive on arbitrary dates — drawdowns and distributions don't follow neat annual periods. XIRR uses actual dates instead of periodic indices, and is the appropriate function in Excel / Google Sheets / Python (`scipy.optimize.brentq` or `numpy_financial.xirr`).
``` =XIRR(values, dates) ```
where values is the cash-flow series (negatives for contributions, positives for distributions and final NAV) and dates is the corresponding date series.
Net vs Gross IRR:
- Gross IRR — measured on the fund's portfolio investments, before fund-level fees, expenses, and carry.
- Net IRR — measured on LP-level cash flows, after fees and carry. This is what LPs care about.
Benchmarks for Indian AIFs (illustrative; vintage-dependent):
- Top-quartile early-stage VC: Net IRR > 25%
- Top-quartile growth-stage PE: Net IRR > 18–22%
- Median market: 10–15%
- Cat I infrastructure / debt funds: 8–14%
IRR's known weaknesses:
- Manipulable by early small distributions — paying back $1 early on a $100 commitment can flatter IRR meaningfully. This is why DPI (cash distributed / paid-in) is often the LP's primary truth metric.
- Assumes reinvestment at IRR — unrealistic for very high IRRs.
- Sensitive to fund tail — late distributions of marked positions distort IRR.
- Not comparable across vintages of different lengths.
Pairing IRR with multiples:
Always report IRR alongside MOIC, DPI, and TVPI. A 30% IRR with a 1.4x MOIC tells a different story from a 20% IRR with a 3.5x MOIC.
Kapitalyze's Fund OS computes XIRR per fund, per vintage, per portfolio company, and per LP — based on actual cash dates in the bank ledger.
Realized cash returned to LPs divided by capital contributed. A DPI of 1.0 means LPs have got their money back; >1.0 means realized profit.
Total value (realized + unrealized) divided by total invested capital. Time-blind cousin of IRR — a 3x MOIC over 4 years is very different from over 12.
GP's performance share of fund profits, typically 20% above an 8% preferred return hurdle. Recent SEBI rules tighten attribution and disclosure.
Order in which fund proceeds flow to LPs and GPs. Two main structures: European (fund-as-a-whole) and American (deal-by-deal). Indian AIFs lean European.