Internal rate of return (IRR)

The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a series of cash flows equal to zero — the effective annualised return generated by an investment over its holding period. In business valuation and private equity, IRR is the primary performance metric: it is compared to the hurdle rate (minimum required return) and WACC to assess whether an investment creates or destroys value. Unlike NPV, IRR does not require a pre-specified discount rate, making it useful for comparing investments of different sizes and durations.

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Example: a private equity fund acquires a Swiss company for CHF 30.0 million (equity CHF 12.0 million + debt CHF 18.0 million). After 5 years of operations, it exits at CHF 48.0 million EV — generating equity proceeds of approximately CHF 32.0 million after debt repayment. The equity IRR is approximately 22% — comfortably above the fund's 15% hurdle rate, triggering the full carried interest waterfall.

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Hectelion calculates IRR in M&A and private equity transactions, modelling multiple exit scenarios to assess the return profile under base, upside and downside cases.