Lecture 4

Question 1

What are the problem with IRR?

Answer 1

• based on reinvestment assumption
• does not typically not take into account commitment periods, where monies need to be invested “risk-free” in order to be able to meet capital calls
• IRR averages are distorted (verzerrt); medians typically better
• IRR and respective hurdle rate set “conflicting incentives” to time exist

Question 2

What is the solution for the problems of IRR?

Answer 2

• look at both IRR and MOIC (multiple on invested capital)
• look for total returns / existing funds
• be careful with averages across funds
• reinvestment problems less problematic for large investors with mature portfolio

Question 3

How do you calculate the IRR?

Answer 3

Question 4

How do you calculate the MOIC (Multiple on Capital Invested)?

Answer 4