01
Cash waits
Your full commitment is rarely invested on day one. Uncalled capital earns a different return while it waits.
Private markets, translated
The fund says 15.0%.
Your capital says 8.4%.
The internal rate of return (IRR), a popular performance metric in private markets, is not the annual return earned by your investment capital. Idle cash, capital calls, distributions, reinvestment and fees all affect what you actually earn.
Run the numbers01 / THE CALCULATOR
Put the headline
to the test.
Move any assumption. The result updates instantly.
YOUR ASSUMPTIONS
Shape the investment
5%30%
$25m$250m
$10m$200m
3 years7 years
0%10%
0%10%
YOUR WEALTH OVER TIME
Where the money actually sits
Liquid wealth Fund value Total
Total paid into fundUS$112.7m
Total returned to investorUS$200.8m
Net multiple (TVPI)1.78×
02 / WHY THE GAP?
The IRR is not wrong.
It is incomplete.
IRR is the discount rate that makes a fund’s capital calls and distributions balance. By itself, it is not the annual return earned by the investor.
Treating IRR as an annual return effectively assumes that distributions can be reinvested, and later calls financed, at the same IRR. To translate it into an investor return, we need assumptions about what uncalled capital earns, when capital is called and returned, and what distributions earn after they come back.
So the number that matters for planning is the annual rate that turns all your starting wealth into what you actually have at the end.
02
Money comes back
Distributions arrive before the fund ends. What you earn next depends on how quickly you reinvest them and what return you earn afterwards.
03
Fees reduce what compounds
Management fees and performance fees reduce the wealth that remains yours to compound.
THE TAKEAWAY
A fund can deliver its target net IRR,
but your wealth can compound at a very different rate.
Try another scenario ADDITIONAL INFORMATION
More context,
beyond the IRR.
PUBLIC MARKET EQUIVALENT (PME)
Did the fund beat your liquid opportunity cost?
A useful way to complement IRR and gain a more complete view of performance is to compare what the fund earned with what the same capital could have earned in a public-market investment carrying similar economic risk.
The Kaplan–Schoar Public Market Equivalent (KS-PME) is a common measure for this. It compares the value produced by the fund with what the same capital calls would have produced in a liquid alternative, while matching the timing of every call and distribution.
Choose the annual return of that liquid alternative below to see whether investing in the fund added value or imposed an opportunity cost.
0%15%
How to read it: 1.00× means the two investments matched. Above 1.00× means the fund did better. Below 1.00× means the liquid alternative did better.
KS-PME1.29×
Fund ahead
On a cash-flow-matched basis, the fund created about 29.4% more value.
Your private-market wealth outcomeUS$223.6m
If all starting capital stayed liquidUS$215.9m
WHO RECEIVES THE PROFIT?
The return split between investor and manager
Gross fund profit is divided between the investor’s net profit, management fees and the performance fee, also called carried interest.
Investor net profitUS$88.1m69.9% of gross profit
Management feesUS$12.7m10.1% of gross profit
Performance feeUS$25.2m20.0% of gross profit
The manager receives US$37.9m in total, equal to 30.1% of the fund’s gross profit in this scenario.