---
title: "Internal Rate of Return"
url: "https://mahouse.world/glossary/internal-rate-of-return"
type: "glossary term"
topic: "Performance measurement"
author: "Ihor Vlasov"
reviewed: "2026-09-20"
published: "2026-08-10"
---

# Internal Rate of Return

The internal rate of return is the annual rate at which a series of cash flows — money out, money back — discounts to zero: the compound return the investment actually earned, allowing for when each euro left and returned. It is the standard measure of private equity and venture performance, and the one most easily flattered, because a euro returned early counts for more than a euro returned late whatever the total.

**Also known as:** IRR, Internal rate of return, Annualised return

## Key facts

- **Used at:** fund performance (net IRR to LPs, gross IRR on deals), deal evaluation (the sponsor's 20–25% target), hurdle rates, and investment appraisal generally
- **Binding:** no — a calculation; but fund marketing and benchmark rankings rest on it, and regulators police how it is presented
- **Typical fund levels:** a top-quartile buy-out fund earns a net IRR above 20%; the median is in the low teens; venture spans from negative to above 40% for the best vintages
- **Typical distortions:** a subscription line that delays capital calls raises IRR without changing the money made; an early exit of one deal lifts a fund's IRR for years; a small, fast win can show a high IRR on a trivial sum
- **Parties:** GPs who report it, LPs who compare it, and the benchmark providers who rank funds on it by vintage

## How IRR works in practice

A fund calls €100m from investors over three years and returns €220m over years four to eight. The multiple is 2.2×; the IRR is the rate at which the outflows and inflows net to zero — about 17% a year for that profile. Had the same €220m come back in years three to five, the IRR would be near 28%; had it come back in years eight to twelve, near 10%. Same money, three answers, because IRR prices time. That is its virtue — it rewards getting money back sooner — and its vice, because it can be managed.

The management is legal and known. A subscription credit line lets a fund buy companies with borrowed money and call the LPs' capital a year later; the clock starts later, the IRR rises a few points, and the multiple is untouched. A quick sale of one company at 3× in year two lifts the fund's IRR far above what its eventual 2× multiple justifies, and the fund is marketed on the IRR. So LPs read IRR alongside the multiple — DPI (distributions to paid-in) and TVPI (total value to paid-in) — and ask how much was borrowed and for how long.

For a deal, IRR is the sponsor's hurdle: a buy-out modelled at a 22% IRR over five years is a 2.7× multiple; the same 22% over three years is 1.8×, which is why sponsors like early exits and LPs like multiples.

## Example

Two funds of €300m. Fund A calls capital over four years, exits over years five to nine, returns €660m: 2.2×, IRR 16%. Fund B uses a subscription line for the first eighteen months, so its calls begin in year two; sells one company at 4× in year three; and returns €600m by year nine: 2.0×, IRR 19%. On IRR, B beats A; on money made, A returned €60m more on the same commitment. An LP that ranked managers by IRR re-ups with B; one that ranked by DPI at year seven — A had returned 1.4× of paid-in, B 0.9× — re-ups with A. Both were reading a true number.

## Common mistakes

- Comparing IRRs of funds with different subscription-line usage, which is comparing clocks.
- A fund marketed on the IRR of its first exit.
- Confusing a high IRR on a small, fast deal with a fund that made money.
- Reading a target's "22% IRR" in a sponsor's model without the holding period that turns it into a multiple.
- Presenting IRR without DPI, which is the number that arrived.

## Related terms

- [Multiple on Invested Capital](https://mahouse.world/glossary/multiple-on-invested-capital.md)
- [Hurdle Rate](https://mahouse.world/glossary/hurdle-rate.md)
- [J-Curve](https://mahouse.world/glossary/j-curve.md)
- [Discounted Cash Flow](https://mahouse.world/glossary/discounted-cash-flow.md)
- [Carried Interest](https://mahouse.world/glossary/carried-interest.md)
- [Capital Call](https://mahouse.world/glossary/capital-call.md)

— Ihor Vlasov, M&A FinTech Expert. Last reviewed 2026-09-20. https://mahouse.world/authors/ihor-vlasov