Which return multiple is commonly used to measure the performance of private equity funds?

The Internal Rate of Return (IRR) is widely regarded as a key metric for measuring the performance of private equity funds. This metric represents the annualized rate of return on an investment, capturing the time value of money. Investors in private equity funds are particularly interested in IRR because it accounts for the timing of cash flows, which can vary significantly in private equity investments due to the illiquid nature of the asset class.

The IRR helps investors understand the potential growth of their investment over time and allows for comparison among different investment opportunities, taking into consideration the varying durations of investments. Thus, it is a crucial tool for evaluating the effectiveness of a private equity fund's management and strategy in generating returns on the invested capital.

In this context, while cash-on-cash return provides useful insights into immediate returns relative to cash invested, and net present value calculates the profitability of an investment based on projected cash flows, these metrics do not encapsulate the comprehensive return profile over time. The price-to-earnings ratio, on the other hand, is more commonly applied in the valuation of publicly traded companies rather than private equity performance assessments.