Time-zero strips out the calendar order of the deals; the pooled IRR on actual dates rewards an early winner. Neither is an investor's return, and the average of deal IRRs is neither.
A time-zero IRR moves every deal's cash flows to a common start date, keeps each deal's holding period, and solves one IRR on the total. On five illustrative realised deals with 80 invested and 147 returned, the time-zero IRR is 15.5 per cent, the pooled IRR on actual dates 16.5 per cent, and the simple average of the deal IRRs 23.1 per cent. Time-zero is the one that does not depend on the calendar order of the deals: reorder them and the pooled figure ranges from 11.2 to 16.5 per cent while time-zero stays put.
Worked in full in Private Markets Performance by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Track records presented for fundraising, especially for a first institutional fund or a deal-by-deal team, often show one of these three figures without saying which. They answer different questions, and on the same deals the gap between them can run to several percentage points.
| Deal | Entry | Cost | Exit | Proceeds | Years | Multiple | Deal IRR |
|---|---|---|---|---|---|---|---|
| A | 2014 | 10 | 2016 | 30 | 2 | 3.00x | 73.2% |
| B | 2015 | 20 | 2022 | 36 | 7 | 1.80x | 8.8% |
| C | 2017 | 15 | 2019 | 6 | 2 | 0.40x | −36.8% |
| D | 2018 | 25 | 2024 | 50 | 6 | 2.00x | 12.2% |
| E | 2019 | 10 | 2021 | 25 | 2 | 2.50x | 58.1% |
| Total | 80 | 147 | 1.84x |
Time-zero: CFk = Σ over deals of (flows occurring k years after that deal's entry); solve Σ CFk ÷ (1 + r)k = 0
Pooled on actual dates: sum all deals' flows by calendar year; solve the same equation
In Excel, lay the deals out in rows with one column per year since entry (year 0, 1, 2 ...), sum each column, and apply =IRR() to the totals row. For the pooled IRR, use calendar-year columns instead, or =XIRR() on the actual dates.
Step 1, shift each deal to year 0. All five deals invest at year 0: 80 out. A, C and E exit after two years: 30 + 6 + 25 = 61 back at year 2. D returns 50 at year 6 and B 36 at year 7.
Step 2, solve the IRR. −80, 0, 61, 0, 0, 0, 50, 36 gives 15.5 per cent.
Step 3, the pooled IRR on actual dates. Summing by calendar year gives −10 in 2014, −20 in 2015, +30 in 2016, −15 in 2017, −25 in 2018, −4 in 2019 (C's 6 back against E's 10 in), then 25, 36 and 50 in 2021, 2022 and 2024. That solves to 16.5 per cent.
Step 4, the average. (73.2 + 8.8 − 36.8 + 12.2 + 58.1) ÷ 5 = 23.1 per cent. Weighted by cost it is 15.5 per cent, a coincidence on this record rather than a method.
| Measure | Value | What it answers |
|---|---|---|
| Multiple | 1.84x | how much money the deals made |
| Time-zero IRR | 15.5% | the rate earned by the deals as a portfolio, independent of when they happened |
| Pooled IRR, actual dates | 16.5% | the rate on the net cash flows of a vehicle that did all five deals |
| Cost-weighted average of deal IRRs | 15.5% | nothing in particular |
| Simple average of deal IRRs | 23.1% | nothing: short winners dominate |
The pooled IRR on actual dates is higher here because deal A returned 30 in 2016, before C, D and E needed money. Those early proceeds net against later investments, and the IRR treats them as if they were reinvested at the IRR itself. A manager who happened to land an early winner gets a higher pooled IRR for the same deals; the time-zero calculation removes that sequencing luck. The reason averaging rates fails is set out at fund level in why fund IRRs cannot be averaged.
Keep every deal's cost, proceeds and holding period, and change only the calendar years.
| Sequence | Pooled IRR, actual dates | Time-zero IRR |
|---|---|---|
| As above: A first | 16.5% | 15.5% |
| C, the loss, moved first (2013 to 2015) | 13.9% | 15.5% |
| A, the winner, moved last (2021 to 2023) | 12.6% | 15.5% |
| C first and A last | 11.2% | 15.5% |
A 5.3-point range on identical deal outcomes. That is the argument for time-zero when the question is the team's deal selection. The argument against it is that it describes a portfolio no investor ever held: in reality capital was deployed over years, and a fund investor experiences the actual-date timing. Neither figure is wrong; each must be labelled.
With unrealised deals the same logic applies with the current value as a terminal flow, but the time-zero version then places every NAV at a different horizon, which is harder to defend. For that reason some allocators accept a time-zero IRR only on realised deals.
Presenting the average of deal IRRs as the track record's return. On this record it is 23.1 per cent against 15.5 per cent on time-zero, because each two-year winner carries the same weight as the six- and seven-year deals, D and B, which made most of the money. The second mistake is comparing one manager's time-zero IRR with another's pooled IRR: on the same deals they differed here by up to 4.3 points.
The worksheet on reading someone else's number, its six questions and seven conventions, is among the working documents in the free companion files for this book.
An IRR computed after moving every deal's cash flows so that all deals start on the same date, keeping each deal's holding period and amounts. On five illustrative deals totalling 80 of cost and 147 of proceeds, the time-zero cash flows are 80 out at year 0, 61 back at year 2, 50 at year 6 and 36 at year 7, which solve to 15.5 per cent.
Put each deal in a row and its cash flows in columns by years since that deal's entry, not by calendar year: column 0 for the investment, column 2 for an exit after two years, and so on. Sum each column and apply IRR to the totals. On the five illustrative deals the totals are minus 80, 0, 61, 0, 0, 0, 50 and 36, giving 15.5 per cent.
Yes, it depends on the order of the deals. On the illustrative record, the actual sequence, with an early winner, gives 16.5 per cent pooled against 15.5 per cent time-zero. Put the same winner last and the early loss first, and the pooled IRR falls to 11.2 per cent while the time-zero IRR stays at 15.5 per cent. Ask for both, and for the multiple.
This article is one calculation from Private Markets Performance. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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