Internal Rate of Return (IRR)

IRR is a money-weighted return, meaning it reflects not only how much a fund earned but also when cash moved in and out. A large distribution returned early in a fund's life boosts IRR significantly, because the money had less time "at work." This differs from time-weighted returns, which strip out the effect of cash-flow timing and are more common in public-market reporting.

For wealthy families evaluating private markets, IRR is the standard performance metric reported by private equity, venture capital, and private credit funds. However, it can be meaningfully distorted by subscription credit lines — short-term borrowing facilities a fund uses to pay early investments before calling capital from investors. Because the investor's cash sits on the sideline longer, the time period shrinks and IRR appears higher, even if underlying returns are unchanged.

Consider a hypothetical family that committed capital to a buyout fund. The fund used a subscription line for several months before drawing their capital, reporting a strong IRR. The same investments without the credit line would show a noticeably lower IRR. This is not fraud — it is arithmetic — but it makes comparing IRR figures across funds complex unless the methodology is consistent. Pairing IRR with DPI and TVPI gives a more complete picture.