Recent experience with IRR calculation

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January 24, 2025

by an member from Stevens Institute of Technology - School of Business

How do you calculate the true internal rate of return (IRR) for a fund when cash flows from recycling capital are indistinguishable from new capital inflows? How does this impact performance metrics and LP decision-making?

As I have been learning more about PE fund performance measurement, I have been quite confused about how to approach this scenario.

I would love to hear any feedback you all have.

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Reply by a searcher
from Harvard University in Dubai - United Arab Emirates
IRR for the fund LPs would also be calculated on as a matter of when their capital went in and was returned; money recycled is just money not returned from a calculation standpoint.

What does impact significantly LP considerations however is the capital call timeline. Investors that aren't aware of when a fund is calling capital might need to leave significant capital accessible in a checking account (or equivalent) for an extended period of time while waiting for that capital call. It doesn't affect the net IRR calculation but does affect overall LP financial performance as that accessible cash is sitting unused.
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Reply by a professional
from The University of Texas at Austin in Dallas, TX, USA
IRR is a net number. Better to look at DPI for contiguous cash flows.
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