IRR Can Be Useful – If You Know How To Use It

by Michael Roth

In our look at Investment Multiples, we dug deep into the various investment multiple metrics that are commonly used to evaluate fund performance. Alongside multiples, investors frequently consider the Internal Rates of Return (“IRR”) to get a complete view of a fund’s performance. The CFA Institute also requires funds to report the since inception IRR, along with the DPI, RVPI, and TVPI. In this post, I will detail the IRR formula and point out some well known shortcomings with IRR, but also argue that IRR can be a powerful tool in the right situation.