The Truth About Private Equity Performance

Oliver Gottschalg (1) , Ludovic Phalippou

1 GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC

The article reports that calculating the performance of private equity funds with a modified internal rate of return (M-IRR) results in a more accurate performance yield or true return. The problem with the internal rate of return (IRR) method is that IRR overstates the fund's performance and misrepresents its relative ranking, which misleads investors about the reinvestment of cash proceeds and makes it difficult to compare fund managers. An example is given showing how M-IRR better represents the rate of return for private equity funds.

Keywords: Private equity funds; Performance

Domains: Humanities and Social Sciences; Business administration; Strategy and business policy

Oliver Gottschalg, Ludovic Phalippou. The Truth About Private Equity Performance. Harvard business review, 2007, Vol. 85, n° 12, pp. 17-20. ⟨10.1225/F0712D⟩. ⟨hal-00458707⟩