Thread by @sf_sun_rise

1/ Thread - IRR fallacy: IRR is one of the most abused and misunderstood metrics in finance.

Used for false marketing by PE GPs and misused even among experienced LPs.

If EBITDA is bullshit earning, IRR is bullshit return.

#IRR #EBITDA

2/ Many claim Buffett is “pretty good private equity manager” who happened to structure permanent equity and compound over long period.

Well, let’s examine two cases why 20% compounded return and 20% IRR by PE funds are just different animals

#IRR

3/ For a $500M fund with $100M drawdown and exit, to achieve 20% IRR (top quartile in most cycle), $700M of wealth made. $700M wealth for $500M or commitment over 10 years is solid but not great especiallly before fees

4/ For a $500m Berkshire compounded 20% over 10 years over $2,500M of wealth is generated. Buffet had to compound the entire commitment, every year. The difference is massive.

#IRR

5/ In reality, GPs use all trick to calling capital as late as possible..bank facilities and other fin engineering techniques to prop IRRs.

In practice, LP committed fund needs to be liquid earning low returns. But LPs don’t mind since they want to report nice IRR numbers.

6/ This is before Gross vs Net IRR, fund cash flow vs LP cash flow IRRs.

Howard Mark wrote a good article on this “You can’t eat IRR”

#IRR #BSReturn

oaktreecapital.com/docs/default-s…

#IRR