Understanding IRR in Private Equity Performance Measurement

Very Easy Private Equity Valuation Performance Measurement

In the context of private equity investments, performance measurement is crucial for evaluating the returns generated by these investments. One common metric used in performance measurement is the Internal Rate of Return (IRR). Consider the following scenario involving a private equity firm conducting a performance assessment of its funds over a specific period.

Given this scenario, which of the following statements best reflects the use of IRR in evaluating private equity performance?

IRR represents the annualized effective compounded return rate that can be earned on a capital investment.

IRR only accounts for cash inflows, ignoring cash outflows during the investment period.

IRR is less useful than multiple of invested capital (MOIC) when comparing funds of different sizes.

Hint

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