Private Equity Fund Performance Measurement

Hard Private Equity Valuation Performance Measurement

ABC Capital is analyzing a private equity fund that primarily invests in late-stage venture capital opportunities. The fund manager is assessing the performance of the fund, focusing on the metrics of Internal Rate of Return (IRR) and Multiple of Invested Capital (MOIC). Given that the fund has been operational for seven years, the manager observes a reported IRR of 15% and a MOIC of 2.5x.

The fund’s limited partners inquire about the implications of the reported IRR and MOIC values. They seek to understand how these metrics reflect the performance of their investment compared to the industry benchmarks.

Which of the following statements regarding the performance measurement of the private equity fund is most accurate?

An IRR of 15% indicates that the fund has consistently generated cash flows and has outperformed the typical venture capital benchmark.

A MOIC of 2.5x suggests that the fund has returned two and a half times the initial investment, regardless of the timing of cash flows.

Both IRR and MOIC can be misleading as standalone metrics, especially in funds with varying investment horizons and cash flow timing.

Hint

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