Understanding IRR in Private Equity Performance Measurement

In the world of Private Equity (PE) investing, performance measurement is critical for assessing the success of a fund over its investment horizon. One of the most common metrics used to evaluate PE investment performance is the Internal Rate of Return (IRR). However, IRR has its limitations, particularly in terms of how it responds to cash flow timing and the impact of external factors.

Consider the following scenario: A Private Equity fund has made several investments and has realized some returns while still holding several other investments. The fund is evaluating its performance based on the IRR metric. Given the nature of the investments and potential cash flows, which of the following statements regarding the IRR as a performance measure in the context of Private Equity investing is most accurate?