IRR (Internal Rate of Return)

Category: finance

A financial metric used to evaluate the profitability of potential investments, expressed as an annual percentage growth rate.

IRR calculates the exact rate at which a dollar invested today grows over time, accounting for the "time value of money." For PE and VC firms, achieving an IRR of 20-30% is the standard benchmark for successfully justifying the risk of illiquid, long-term private market investments.

Common Examples

• The investment committee rejected the deal because the projected IRR of 12% failed to meet our firm’s 20% internal performance floor.
• Calculating IRR requires modeling the timing of every capital call and the final exit distribution event.