# IRR — Internal Rate of Return

**IRR** (Internal Rate of Return) is the annualized rate of return that equates the present value of all capital calls (cash out) with the present value of all distributions plus residual NAV (cash in). Unlike [TVPI](/reporting-and-metrics/tvpi.md) or [MOIC](/reporting-and-metrics/moic.md), IRR accounts for *when* cash flows occur.

## Formula

IRR is the value of `r` that solves:

```
0 = Σ [ CashFlow_t / (1 + r)^t ]   for all t

Where:
  CashFlow_t  = distribution amount at time t  (positive)
                OR  capital call amount at time t (negative)
  t           = time in years from the reference date
  r           = IRR (annualized, expressed as a decimal)
```

The residual [NAV](/reporting-and-metrics/nav.md) at the reporting date is treated as a final hypothetical distribution — a liquidation value — when computing IRR for an unrealized or partially-realized fund.

## Why IRR Matters

TVPI and MOIC tell you *how much* capital was returned. IRR tells you *how fast*:

| Scenario        | TVPI | IRR   | What it means                            |
| --------------- | ---- | ----- | ---------------------------------------- |
| 2× over 3 years | 2.0× | \~26% | Strong — capital compounded quickly      |
| 2× over 8 years | 2.0× | \~9%  | Modest — capital tied up for a long time |
| 3× over 5 years | 3.0× | \~25% | Good balance of multiple and pace        |

LPs use IRR to benchmark fund performance against:

* **PME (Public Market Equivalent)** — what the S\&P 500 (or another index) would have returned on the same capital call schedule.
* **Peer fund quartiles** — ILPA and Cambridge Associates publish IRR quartile benchmarks by vintage year and strategy.

## Gross vs Net IRR

|               | What is excluded                                       |
| ------------- | ------------------------------------------------------ |
| **Gross IRR** | Before management fees, expenses, and carried interest |
| **Net IRR**   | After all fees and carry — the LP-level return         |

Net IRR is the LP-relevant figure and the basis for performance fee calculations in some hurdle structures.

## IRR Limitations

**Early-distribution sensitivity.** IRR disproportionately rewards early cash flows. A fund that returns a small amount quickly and a large amount slowly can show a higher IRR than a fund that returns a larger total amount more gradually.

**Interim IRR on unrealized funds.** When a fund is not fully realized, NAV is used as the terminal cash flow. This means interim IRR is only as reliable as the current NAV mark — optimistic marks inflate interim IRR.

## How Gildi Computes IRR

Gildi computes **net IRR** at fund level and per-LP using a Newton-Raphson numerical solver applied to the full time-series of:

1. Capital call dates and amounts (negative cash flows)
2. Distribution dates and amounts (positive cash flows)
3. Current NAV as a terminal "distribution" at the reporting date

IRR is displayed on the LP fund overview page and in the GP reporting dashboard alongside [TVPI](/reporting-and-metrics/tvpi.md), [DPI](/reporting-and-metrics/dpi.md), and [RVPI](/reporting-and-metrics/rvpi.md).


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