In relation to private equity (PE) and venture capital (VC) funds, it is the discount rate that makes the net present value of all the cash flows at inception and at termination that are appraised values or are other cash flows during the investment’s lifetime, equal to zero.

This measure of internal rate of return (IRR) takes into consideration the cash flows, realized or appraised (but not anticipated), generated point to point (at inception and termination) over the investment’s life. In other words, it is calculated using beginning and end of period market values and cash flows within the relevant period. The IRR calculation involves cash flows in which the first and last reported cash flows are appraised values. Therefore, it reflects calculation of performance over part of an investment’s life.