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Calculating Private Equity IRR with Unrealized Portfolio Value

Article Quant Q&A · Author: Arfeen Zia
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Summary

The document explains how dated private equity cash flows enter an internal rate of return calculation. Capital calls and management fees are outflows and should be recorded as negative amounts; distributions are inflows and should be positive. For an investment that has not yet been realized, the portfolio’s net asset value can be entered as a positive terminal value to represent its estimated worth at the measurement date.

Without distributions or an estimate of current NAV, the available outflows alone do not produce a meaningful fund IRR: the cash-flow series needs a positive value to solve for a return. Estimating NAV requires information about the underlying portfolio, and the answer offers no valuation method or guidance for choosing assumptions. Thus the resulting IRR depends on the quality and timing of the unrealized valuation, and should not be treated as a realized return.

Key ideas

  • Record capital calls and management fees as negative cash flows and distributions as positive cash flows.
  • An unrealized investment can be represented by its estimated NAV as a positive value at the measurement date.
  • Outflows alone cannot determine a meaningful IRR without an inflow or terminal value.
  • An IRR that uses estimated NAV depends on the valuation method and its assumptions.

Tags

StatisticsPortfolio construction
Full text
# Private Equity Fund Return (IRR)


# Private Equity Fund Return (IRR)












Can anyone guide me that how to calculate IRR for Private Equity Fund. I have the following data.

- Capital Call with dates

- Management Fees with dates

I used excel formula of XIRR, but I found that excel need one positive number that could be Distribution or unrealized fair value.

During my search, I found a document stating that all your capital call and management fee should be negative and Distribution or unrealized fair value should be position. Unfortunately, I don't have Distribution or unrealized fair value at this stage.

kindly suggest how can I calculate return.

## Answer by Magic is in the chain (score 1, accepted)

https://quant.stackexchange.com/a/42051

Your approach is right: Take all the cash flows (outgoing with negative signs and incoming with positive sign), for unrealised take the NAV. If you don’t have NAV, then you will need to find a way to estimate the net value of the underlying portfolio, and the estimation approach would depend on the nature of the assets in the portfolio. If you know nothing about the underlying portfolio, then maybe time to switch to another PE firm!

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.