The Tyranny of IRR

28 Pages Posted: 10 Dec 2024 Last revised: 10 Dec 2024

See all articles by Ludovic Phalippou

Ludovic Phalippou

University of Oxford - Said Business School

Date Written: December 03, 2024

Abstract

The use of since-inception Internal Rate of Return (si-IRR) may contribute to the prevailing belief that private equity returns are much greater than those of other asset classes. This perception, in turn, drove the sharp increase in capital allocated to private equity funds in developed markets, and their fast penetration into retail investor portfolios. The "Yale model," which posits that superior returns arise from substantial allocations to private equity, is heavily predicated on a si-IRR. Prohibiting the use of si-IRRs, mandating horizon-IRRs with some restrictions, and changing the name so that it does not include the term ‘rate of return’ (e.g., Internal Discount Rate) may help, but essentially whilst the Net Present Value of an illiquid asset is well defined, a rate of return isn’t.

Suggested Citation

Phalippou, Ludovic, The Tyranny of IRR (December 03, 2024). Available at SSRN: https://ssrn.com/abstract=5042563 or http://dx.doi.org/10.2139/ssrn.5042563

Ludovic Phalippou (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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