Look for cash-flow dates, refinance assumptions, sale timing, reinvestment of proceeds, and whether sponsor fees are included.
Plain-English term
IRR
A time-weighted return metric that cares when cash comes back.
Definition that survives review
Internal rate of return estimates the annualized discount rate that makes all projected cash flows equal the original investment. In a real review, translate the term into the cash flow, priority, deadline, tax treatment, status test, or control right it changes.
Use it to compare timing of cash flows after you also know total dollars back. If you cannot point to the exact document or calculation behind it, you have recognized the vocabulary but not yet understood the deal.
Why it matters
IRR loves speed. It can make an early refinance look heroic even when the total dollars are not that impressive. This is why the term is not finished until you know who calculated it, what period it covers, and what happens if the friendlier definition is wrong.
A useful glossary entry should show where the word appears, what input changes it, and which connected term changes the answer next: Equity multiple, Cash-on-cash return, Waterfall.
How to use it in diligence
IRR solves for the annualized rate that makes projected cash flows equal the original investment.
Two deals can both show a 17% IRR. One may return your money fast with modest total profit; the other may build more total dollars over a longer hold.
IRR can reward speed more than substance. Pretty timing can hide mediocre total profit.
Proof checklist
- The source period, calculation basis, and owner of the number are named.
- The term reconciles to the PPM, operating agreement, lender documents, tax schedule, underwriting model, or verification record.
- The downside version is visible before the optimistic version gets trusted.
Example, trap, question
Two deals can both show a 17% IRR. One may return your money fast with modest total profit; the other may build more total dollars over a longer hold.
IRR can reward speed more than substance. Pretty timing can hide mediocre total profit.
- for equity multiple beside IRR. If they only want to show one number, they probably like that number too much.
- What source document, schedule, or third-party evidence proves this term in this specific deal?
- Which connected term changes the answer next: Equity multiple, Cash-on-cash return, Waterfall?
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