Private Internal Rate of Return

The private internal rate of return is the internal rate of return measured from the perspective of the private investor or private-market capital provider.

It is often used in private equity, private credit, project finance, and direct investments where cash flows are irregular and ownership is not continuously priced in public markets.

How It Works

Private IRR uses the timing of contributions, distributions, fees, and exit proceeds to compute the discount rate that sets net present value to zero for the investor’s cash flows.

Because private cash flows can be lumpy, timing has a major effect on the measured IRR.

Worked Example

Two investments can produce the same total cash profit but very different private IRRs if one returns capital much sooner.

That is why private IRR is highly sensitive to timing, not just final profit.

Scenario Question

An investor says, “If two deals produce the same total gain, they should have the same IRR.”

Answer: No. Earlier cash recovery can produce a much higher IRR than the same dollar gain received later.

Related Terms

• Internal Rate of Return: The general concept on which private IRR is based.
• All-Equity Net Present Value: Another way to evaluate private investments using discounted cash flows.
• Risk-Adjusted Return: A high IRR is not enough if the underlying risk was excessive.
• Fund Value: Private fund valuation and cash-flow timing interact with reported return measures.
• Net Internal Rate of Return: A related measure after fees and expenses.

FAQs