IRR (Internal Rate of Return)
The annualised return on an investment, expressed as the discount rate that makes the net present value of all cash flows equal to zero.
Also known as: Internal Rate of Return, Equity IRR
One-line definition
IRR is the annualised return a PE investor earns on its equity from entry to exit — the primary performance metric in private equity.
Formula
NPV = 0 = −Initial investment + Σ(Cash flow_t / (1 + IRR)^t)
Practical context
A PE fund targets 20–25%+ IRR. The three levers are: entry multiple, exit multiple, and leverage. TS work affects the entry price (EBITDA adjustments) and therefore the equity invested — directly impacting IRR.
Related terms
MOIC (Multiple on Invested Capital)
The ratio of total proceeds from an investment to the total capital invested, without adjusting for time.
LBO (Leveraged Buyout)
An acquisition financed primarily with debt, where the target's cash flows service the leverage and equity returns are amplified.
Equity Value
The value of the shareholders' stake in a business, derived by subtracting net debt from enterprise value.