Understanding IRR in Private Equity Performance Measurement

Private equity (PE) investments are evaluated using various performance metrics to assess their effectiveness. One commonly used metric in performance measurement is the Internal Rate of Return (IRR). Understanding how to measure and interpret IRR is essential for investors in private equity, as it helps them evaluate the profitability of their investments over time.

When investors compare multiple private equity funds, they often focus on performance indicators that reflect the cash flows generated and the timing of those cash flows. In this context, which of the following statements regarding the Internal Rate of Return (IRR) in private equity is correct?