Ratz IRR: Performance Measurement in the Absence of Cash Flow Data

Abstract

In this paper we introduce a methodology to estimate the portfolio IRR from portfolio constituents, when only the IRR and the money multiples of the constituents are available. We call this methodology RATZ IRR (reconstructed average time zero internal rate of return). There will be a deviation from the true portfolio IRR, as not all cash flow information is available. We show the analytical expression of the difference between the RATZ IRR and the time zero portfolio IRR. We show empirical evidence of the quality of the estimator using a proprietary data set from a large private equity investor. Furthermore, we present an application of the RATZ IRR, through comparing the private equity portfolios of several large US public pension plans.

Keywords: Private Equity, Performance, Performance Measurement, IRR, Internal Rate of Return