How to Measure Private Equity Performance: IRR vs. Multiples

Understanding Private Equity Performance: IRR vs. Multiples

In private equity, the most commonly used performance metric is the Internal Rate of Return (IRR). IRR represents the annualised rate at which invested capital grows to match the total value of distributions received or the final fair value of the investment.

For example, if £100 is invested and £108 is received after one year, the IRR is 8%. But if £108 is received after just six months, the IRR increases to 16%, highlighting the importance of time in this metric.

Net IRR vs. Gross IRR

IRR can be reported in two ways:

• Gross IRR excludes management fees, fund expenses, and carried interest.
• Net IRR includes these costs and reflects the actual return investors receive.

For limited partners, net IRR is the more relevant figure, as it shows the true after-fee performance of their investment.

The “Times Money” (TVPI) Metric

Another key performance measure is the “times money” or TVPI (Total Value to Paid-In) multiple. This is a simple ratio of total value received or receivable divided by total capital invested. For example:

• A TVPI of 1.5x means the investor has received or will receive 1.5 times their original investment.
• A TVPI of 2x means the capital has doubled.

While easy to understand, this metric does not account for the timing of returns. For instance, a 1.2x return over six months equates to an annualised return of around 44%, whereas the same 1.2x return over five years drops to just 3.75%.

Reporting Standards and Best Practice

According to the Institutional Limited Partners Association (ILPA) guidelines, investors should receive detailed quarterly reporting. These reports generally include:

• Fund-level financials: balance sheet, income statement, cash flow summary
• Performance metrics: IRR, TVPI, DPI (Distributions to Paid-In)
• Deal-level information: cost, fair value, distributions received
• Commentary on portfolio company performance and valuation methodology

While reporting formats vary between managers, the industry standard is clear: adhere to ILPA guidelines and deliver timely, transparent, and consistent data within the deadlines defined in the Limited Partnership Agreement (LPA).

For definitions of all key performance metrics, refer to the Glossary of Investment Return Terminology (see page 22).