A compound rate of interest worked out over the life of a private equity fund reflecting both the investment return and the rate at which the return is produced.

The IRR is calculated by way of an iterative mathematical formula which values, at the date of exit, the cash spent by the private equity provider (usually subscription monies for shares and loan stock in the new company) and cash returned (usually interest, dividends, share or loan stock redemptions and share sale proceeds).

The IRR is the discount factor which, when applied to these cash flows, produces a net present value equal to zero. It is broadly equivalent to a notional rate of compound annual interest earned on money invested.