Evaluating IRR in Private Equity Investments

Consider a private equity firm that specializes in leveraged buyouts (LBOs). This firm is evaluating two potential acquisition targets, Company A and Company B. Company A has a predictable cash flow and a strong market position, while Company B is a turnaround situation requiring significant operational improvements. One of the key metrics the firm uses to assess potential investments is the internal rate of return (IRR) on the invested capital.

When evaluating both companies, which target is likely to provide a higher IRR for the private equity firm in the long run?