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20 December 2025 · 10 min read

Why IRR Is Not Enough

Understanding the limitations of headline performance metrics in private equity

FrameworksRisk

Key Takeaways

  • IRR is sensitive to timing and can be inflated through early distributions and subscription credit lines.
  • TVPI, DPI, and RVPI provide complementary perspectives that IRR alone cannot capture.
  • Investors should demand multiple performance metrics and understand the assumptions behind each.

The dominance of IRR

Internal Rate of Return (IRR) has become the default performance metric in private equity and venture capital. It appears in virtually every fund marketing document, quarterly report, and industry benchmark. Yet IRR, while mathematically precise, is frequently misunderstood and can be actively misleading.

How IRR can deceive

Timing sensitivity

IRR is extraordinarily sensitive to the timing of cash flows. A fund that returns capital early — even at modest multiples — can report a high IRR. Conversely, a fund that generates superior absolute returns over a longer period may report a lower IRR.

This creates a perverse incentive: managers focused on IRR may prioritise early exits over value maximisation.

Subscription credit lines

The widespread use of subscription credit facilities has further distorted IRR figures. By delaying capital calls, managers can compress the apparent holding period and inflate IRR — without any change in the fund's actual investment performance.

Unrealised valuations

For funds with significant unrealised portfolios, IRR calculations depend heavily on interim valuations. These valuations are typically provided by the manager and may not reflect realisable market prices.

Complementary metrics

A more complete picture of fund performance requires multiple metrics:

  • TVPI (Total Value to Paid-In): Measures total value generated relative to capital called, regardless of timing.
  • DPI (Distributed to Paid-In): Focuses on actual cash returned to investors — the most concrete measure of realised performance.
  • RVPI (Residual Value to Paid-In): Represents the unrealised portion of the portfolio, subject to valuation uncertainty.

    • The role of benchmarking

    Even with multiple metrics, performance must be contextualised. Comparing a 2019 vintage venture fund to a 2015 vintage buyout fund is analytically meaningless without adjusting for strategy, geography, and market environment.

    Conclusion

    IRR remains a useful metric, but it should never be the sole basis for evaluating fund performance. Sophisticated investors examine multiple metrics, question the assumptions behind each, and consider the economic substance of cash flows rather than their mathematical representation.

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    This research reflects independent analysis by Nomera Capital and does not constitute investment advice. Nomera Capital does not act as a financial advisor, broker, or asset manager.