IRR Performance Evaluation in Private Equity

Medium Private Equity Valuation Performance Measurement

XYZ Capital is a private equity firm considering the performance measurement of its portfolio. The firm defines its internal rate of return (IRR) based on cash flows from its investments and their timing. Recently, they have come under scrutiny regarding their performance evaluation metrics.

As a CFA Level 2 candidate, you need to identify the correct statement about the IRR as a performance measure for private equity investments compared to the public markets.

IRR accounts for the timing of cash flows, which can lead to misleading performance comparisons with public market benchmarks.

IRR ignores the scale of the investment, making it unsuitable for comparing funds of different sizes.

IRR provides a consistent measure that captures both the risk and return profile of private equity funds relative to public market performance.

Hint

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