Performance measurement in private equity

The most widely used performance measure in private equity (PE) is the internal rate of return (IRR). In order to calculate the rate of return of a PE fund, the final and definitive valuation of the residual assets in the fund's portfolio and the exact timing and magnitude of the cash distributions to investors are needed. Monthly cash flows from all funds in the group can be pooled and, then, the IRR is calculated based on the net cash flows of the individual PE fund. This method is referred to as pooled IRR and is used for most PE performance measurement exercises. The question of how PE as an asset class performed compared with investments in the public markets has received much attention from practitioners and academics alike. Data limitations and the long investment cycle in PE make it difficult to provide a definitive answer to this question.