Which method is commonly used to assess a fund's performance?

The Internal Rate of Return (IRR) is a widely used method to assess a fund's performance because it calculates the annualized effective compounded return rate that can be earned on a fund's investments, taking into account the timing and scale of cash flows over the investment period. This makes it particularly useful for private equity and venture capital funds, where investments are made at different times and returns are realized over several years.

IRR considers the time value of money, which means that it reflects not only how much profit a fund generated but when those profits were realized. This is crucial in private capital contexts, where early returns could be significantly more valuable than later ones, influencing overall fund performance significantly.

While Net Asset Value (NAV) provides a snapshot of the value of the fund's assets, it does not express performance relative to the time these values were accrued. Return on Assets (ROA) is more relevant for operational efficiency in a business context rather than for investment performance evaluation. Lastly, the Price to Earnings Ratio (P/E) is a measure used mainly in equity valuation metrics, primarily for publicly traded companies, and is not suitable for assessing the performance of funds that invest in private companies or structures.