Show me the money

In the world of private equity, IRR has become much more than a mathematical algorithm. It has become both badge of honour and shorthand for all that's wrong with funds' disclosure of past performance. Its ambiguity is notorious. Investors allege that it lends itself to manipulation. They ridicule its readiness to provide GPs with numbers designed to make their funds look pretty. Try and compare one IRR with another, they say, before mumbling something about apples and oranges. ?I hate IRR?, one even said when interviewed for this month's cover story on page 26.

In some respects, IRR and the private equity industry more broadly is still suffering the after-effects of the great Internet stock boom and bust. In those heady days, both GPs and LPs began to believe in IRRs that were little more than fantasy. And now the party's over, many are struggling to downwardly adjust both expectations and actual realisations.

But does this make IRR a useless tool to evaluate a fund's performance? Not if you recognise its limitations – but how many have come this far? Find out in our feature that looks inside IRR and reveals what it is and what it isn't.

Philip Borel

Managing Editor