Internal Rate of Return (IRR) for PE/VC Deal Calculator
Calculate IRR for PE/VC deals using detailed cash flows, exit value, and holding period.
Internal Rate of Return (IRR) for PE/VC Deal Calculator
Calculate IRR for PE/VC deals with detailed cash flows including initial investment, annual distributions, and exit proceeds.
Input your PE/VC deal cash flows
Formula
IRR is the discount rate r that satisfies: NPV = Σ(Cash Flow_t / (1 + r)^t) = 0
Cash flows include: initial investment (negative, Year 0), annual distributions (positive, Years 1-N), and exit proceeds (positive, final year).
NPV = Σ(Cash Flow_t / (1 + Discount Rate)^t)
IRR is solved iteratively using Newton-Raphson method or Excel IRR/XIRR functions. IRR accounts for the timing of cash flows and is the primary return metric for PE/VC investments.
Target IRRs vary by strategy: VC 25-40%+, Growth Equity 20-30%, Buyout 20-25%. Top quartile funds achieve 30%+ IRR.
Steps
Enter initial investment (equity invested, negative cash flow).
Enter annual cash flows for years 1-5 (distributions, dividends, optional).
Enter exit value (proceeds at exit, positive cash flow).
IRR annualizes your return, capturing timing. It does not capture scale (that’s MOIC) or risk. A high IRR on a tiny check may be less meaningful than a solid IRR on meaningful dollars.
Building the Cash Flow Timeline
Year 0: Initial investment (negative).
Years 1–N: Dividends/distributions/partial exits (positive). Fees (negative if modeled).
Exit year: Final proceeds (positive), sometimes plus last distribution.
Use after-tax numbers for comparability. Irregular timing → use XIRR with specific dates.
How IRR is Solved (Iteration/XIRR)
IRR solves for r where Σ(CF_t / (1 + r)^t) = 0
Solvers iterate (Newton-Raphson). Multiple sign changes can create multiple IRRs; check for sensible results and compare to NPV at hurdle rates.
Strategy Benchmarks and Quartiles
VC: 25–40%+ (high dispersion).
Growth Equity: 20–30%.
Buyout: 20–25%.
Distressed: 15–25%.
Top quartile often starts near 30%+ IRR; always calibrate to sector and cycle.
Timing Sensitivity and MOIC Link
IRR ≈ (MOIC)^(1/years) - 1. Same MOIC over a longer hold → lower IRR. Early distributions punch up IRR; back-loaded exits drag it down.
Gross vs. Net IRR (Fees and Carry)
Gross IRR ignores fees/carry. Net IRR subtracts management fees and carried interest—often 3–5 percentage points lower. LPs benchmark net; GPs often cite gross.
Solve IRR/XIRR; sanity-check against MOIC and holding period.
Run sensitivities: earlier/later exit, lower exit value, fee drag.
Benchmark to strategy quartiles and fund hurdles.
Flag multiple-IRR cases; confirm NPV at hurdle as a cross-check.
Conclusion
IRR is the timing-aware scorecard for PE/VC. Build clean cash flows, use XIRR for irregular dates, benchmark to strategy norms, and stress timing—small shifts in exit date or value can swing returns dramatically.
FAQs
What is IRR in PE/VC?
IRR (Internal Rate of Return) is the annualized rate of return that makes the NPV of all cash flows equal to zero. It accounts for the timing of cash flows and is the primary return metric for PE/VC investments.
How is IRR calculated?
IRR is the discount rate r that satisfies: NPV = Σ(Cash Flow_t / (1 + r)^t) = 0. Cash flows include initial investment (negative), annual distributions (positive), and exit proceeds (positive). IRR is solved iteratively using Excel IRR or XIRR functions.
What cash flows are included?
Cash flows include: initial investment (negative, Year 0), annual distributions/dividends (positive, Years 1-N), management fees (negative, if applicable), and exit proceeds (positive, final year). All cash flows should be on an after-tax basis.
What is a good IRR for PE/VC?
Target IRRs vary by strategy: Venture Capital: 25-40%+ (high risk, high return), Growth Equity: 20-30%, Buyout: 20-25%, Distressed: 15-25%. Top quartile funds often achieve 30%+ IRR. Returns vary significantly by fund, strategy, and market conditions.
How does timing affect IRR?
IRR is highly sensitive to timing. Earlier exits and distributions increase IRR, while later exits reduce IRR. For example, 2.0x MOIC over 3 years ≈ 26% IRR, but over 7 years ≈ 10% IRR. Timing is critical for IRR calculation.
What is the difference between gross and net IRR?
Gross IRR includes only investment returns, while net IRR deducts management fees (typically 1-2% annually) and carried interest (typically 20% of profits). Net IRR is typically 3-5 percentage points lower and represents returns to limited partners.
How do I calculate IRR with irregular cash flows?
Use Excel XIRR function for irregular cash flows with specific dates. XIRR accounts for exact timing of cash flows, providing more accurate IRR than regular IRR function. Format: XIRR(cash flows, dates).
What if IRR cannot be calculated?
IRR may not exist if all cash flows are negative or positive. Multiple IRRs can occur with alternating positive/negative cash flows. In these cases, use NPV at various discount rates or MOIC as alternative metrics.
How do I validate IRR?
Validate by: comparing to fund benchmarks and similar transactions, reviewing exit assumptions and cash flow projections, assessing reasonableness of timing assumptions, performing sensitivity analysis, and checking against MOIC for consistency.
What is the relationship between IRR and MOIC?
IRR and MOIC are related but different. MOIC measures total return multiple, while IRR accounts for timing. Higher MOIC generally means higher IRR, but timing matters. IRR ≈ (MOIC)^(1/holding period) - 1 is a useful approximation.
Summary
This tool calculates IRR for PE/VC deals with detailed cash flows including initial investment, annual distributions, and exit proceeds.
Outputs include IRR, NPV at IRR, interpretation, recommendations, an action plan, and supporting metrics.
Formula, steps, guide content, related tools, and FAQs ensure humans or AI assistants can interpret the methodology instantly.
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Internal Rate of Return (IRR) for PE/VC Deal Calculator
Calculate IRR for PE/VC deals using detailed cash flows, exit value, and holding period.
How to use Internal Rate of Return (IRR) for PE/VC Deal Calculator
Step-by-step guide to using the Internal Rate of Return (IRR) for PE/VC Deal Calculator:
Enter your values. Input the required values in the calculator form
Calculate. The calculator will automatically compute and display your results
Review results. Review the calculated results and any additional information provided
Frequently asked questions
How do I use the Internal Rate of Return (IRR) for PE/VC Deal Calculator?
Simply enter your values in the input fields and the calculator will automatically compute the results. The Internal Rate of Return (IRR) for PE/VC Deal Calculator is designed to be user-friendly and provide instant calculations.
Is the Internal Rate of Return (IRR) for PE/VC Deal Calculator free to use?
Yes, the Internal Rate of Return (IRR) for PE/VC Deal Calculator is completely free to use. No registration or payment is required.
Can I use this calculator on mobile devices?
Yes, the Internal Rate of Return (IRR) for PE/VC Deal Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.
Are the results from Internal Rate of Return (IRR) for PE/VC Deal Calculator accurate?
Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.