Private equity performance and the effects of cash flow timing

Abstract

Private equity firms have discretion over the timing of their funds' capital calls and distributions, making the popular internal rate of return (IRR) an incomplete measure of private equity fund performance. Do investors avoid the textbook pitfalls of the IRR when cash flow timing is partly endogenous? In a comprehensive sample of 6,945 funds, the authors find that more than half of the funds' IRR is attributable to timing, with substantial variation. The timing component persists across a private equity firm's funds and facilitates fundraising.

Keywords: Private equity, Returns, IRR, Cash-on-cash multiple, Timing

JEL Classification: G11, G23, G24