Which of the following is one of the two most common return metrics used in private equity?

The Internal Rate of Return (IRR) is one of the two most common return metrics used in private equity because it reflects the annualized effective compounded return rate that can be expected on investments over time. Specifically, IRR is used to estimate the profitability of potential investments and allows investors to compare the efficiency of different investments by providing a single percentage figure representing their return.

IRR takes into account the timing of cash flows, which is especially important in private equity where investments typically have long horizons and cash inflows and outflows may occur at irregular intervals. A higher IRR indicates a more favorable investment scenario, making it a central focus during the evaluation of private equity deals.

While metrics like Return on Investment (ROI), Payback Period, and Net Present Value (NPV) provide valuable insights into investment performance, they do not capture the timing and volatility of cash flows in the same way that IRR does, which is why IRR is preferred for assessing private equity performance.