No. Three funds returning 11.52, 10.12 and 19.51 per cent average to 13.72 per cent, but the money in the programme earned 11.78 per cent — 194 basis points less. The internal rate of return is money-weighted: it depends on how much capital was outstanding and for how long. The only correct aggregate is the pooled figure, obtained by combining every fund’s cash flows into one series, adding every residual value, and solving once.
Why the rate cannot be averaged
An institution holds three funds of the same vintage and strategy, with commitments of 200, 80 and 20 million. Their since-inception internal rates of return are 11.52, 10.12 and 19.51 per cent. The simple average of those three rates is 13.72 per cent. The pooled return — the rate the money actually earned — is 11.78 per cent.
The internal rate of return is a money-weighted measure. It depends on how much money was outstanding and for how long. Averaging the rates of two funds treats them as equal contributors regardless of size, which they are not. Nothing in the arithmetic of an average knows that one fund held ten times the capital of another.
Pooling is the correct method. Combine all the cash flows of all the funds into a single series, add all the residual values, and compute one internal rate of return on the combined object. That figure answers the question an institution actually has: what did the money in this programme earn?
Method
Result
Pooled — all cash flows combined
11.78%
Simple average of the three rates
13.72%
Average weighted by capital called
11.68%
Three ways of aggregating the same three funds.
Where the 194 basis points come from
Entirely from fund C. It called 18 million, which is 6 per cent of the programme’s paid-in capital, and it returned 19.51 per cent. In a simple average it carries a third of the weight. The excellence is real and it is trivial in size, and an average cannot tell the difference.
Fund
Capital called
Distributions
Residual value
IRR
TVPI
A
180.0
280.0
60.0
11.52%
1.889x
B
72.0
104.0
22.0
10.12%
1.750x
C
18.0
45.0
5.0
19.51%
2.778x
Aggregate
270.0
429.0
87.0
11.78%
1.911x
Millions. The aggregate row is pooled, not averaged.
The capital-weighted average, at 11.68 per cent, lands below the pooled figure rather than above it. Weighting by capital called is closer than weighting by nothing, but it weights by capital and not by capital-time, so its error has no fixed sign and it widens as the funds’ durations diverge. An approximation that is sometimes high and sometimes low is not a shortcut worth taking when the exact calculation is one series and one solve.
The multiple has no such problem
Total value across the three funds is 516.0 million against paid-in capital of 270.0 million, so the aggregate TVPI is 1.911x and the aggregate DPI is 1.589x. Those are simple additions. There is no weighting question, no pooling subtlety and no averaging error, which is a genuine reason to put a programme-level multiple beside the programme-level rate. Where the pooled rate and the aggregate multiple tell different stories, the difference is duration, and duration is worth understanding.
Pooling has one honest limitation. A pooled return is dominated by the largest commitments and by the vintages where most capital was deployed. A programme returning 11.78 per cent may contain a strategy that failed and a strategy that did very well, and the pooled figure shows neither. So report it as the headline and decompose it three ways: by vintage year, which separates poor selection from expensive deployment; by strategy, which is the decomposition that supports allocation decisions; and by manager, which is the figure that belongs in front of anyone deciding whether to commit again.
What to report
Three details make pooling defensible. Convert every flow at the rate on its own date before combining, because a portfolio spanning currencies cannot be pooled any other way. Align the flows on the calendar rather than on each fund’s own timeline — fund A’s third year and fund B’s first year fall on the same dates and belong in the same period. And include every residual value, at the same measurement date, net of accrued carried interest.
Then fix the denominator. A programme with 500 of commitments, 300 called, 220 of net asset value and 200 undrawn has a total exposure of 420. An allocation framework measured against net asset value alone understates the programme’s claim on the portfolio by nearly half, and that is what produces the surprise when calls arrive faster than expected. Report exposure, not net asset value.
Pooled since-inception net internal rate of return, decomposed by vintage, by strategy and by manager.
Aggregate TVPI and DPI, which need no weighting decision.
Total commitments, paid-in, net asset value, undrawn and total exposure.
The number of managers and funds, because concentration is invisible in every return figure.
Never average internal rates of return. Pooling takes the same amount of work, and the difference on a real portfolio is frequently larger than 194 basis points.
The workbooks behind this article
Every figure above is a live formula in the free companion files for
Private Markets Performance. Each workbook ends with a Checks sheet
setting the printed figure beside the computed one. No account and no email address.
At what wealth does a family office pay?A five-person office costs the same $2,442,000 at $100m as at $2bn. Against a tiered multi-family schedule the two curves cross exactly once.
Does an undrawn revolver count as liquidity?67.4567 per cent of the headroom, and it leaves at a fall in annual revenue of 8.4127 per cent — not the 13.3333 per cent the board deck implies.
Does supply chain finance count as debt?66,049,315 released, and leverage of 2.7622× or 3.1362× depending on which balance the test is asked of — the second is a breach at today's EBITDA.
Does the fulcrum move with enterprise value?A worked capital structure at three enterprise values. The break migrates from the first lien to the subordinated notes without a single document changing.
How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
How the GP catch-up is actually solvedMost write-ups state the catch-up formula then hardcode the answer. Set it as a solve and it moves on its own when the carry rate does.
How do you set a minimum cash balance?Three components, 124,596,281 in total — and the double count that turns a margin of 27,403,719 into an apparent shortfall of -3,988,281.
Is a 2/10 net 60 discount worth taking?An annualised 14.8980 per cent against a revolver at 4.50 per cent — worth 5,471,890 a year, and 0.3132 turns of reported leverage.
Should corporate debt be fixed or floating?78.1818 per cent of gross debt fixed, and a net floating exposure after cash of -608,000.00 — the proportion, not the instrument.
Six ways to state the same fund's return7.12 per cent, 18.04 per cent, or 1.323 times the public market — one fund, one set of flows. The eleven-point gap is the valuation, and it is not cash.
The IRR at which a closed-ended fund merely tiesA drawdown fund advertising 13.25 per cent ties an evergreen netting 8.64. On committed rather than called capital, 78.7 per cent of the edge vanishes.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
Two routes to the same NAVFive findings in one quarter-end close, and not one of them was a modelling error. Every one was a control that did not exist.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a co-investment programme actually saves37 basis points, and a 22.8 per cent total-loss rate erases it. At the usual per-deal cap a single failure is 37 per cent of the annual cohort.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a lease mark-to-market is actually worth5,788,000 becomes 807,365 once the over-market stream, the expiry dates and the cost of re-letting are priced — and nothing at all below a 43.7 per cent renewal rate.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
What one point of fees actually costsOne point on the annual charge turns 738,846 into 567,961 over forty years — 23 per cent of the pot, and 2.43 of wealth lost per 1 of fee.
When the promote stops clearingCarried interest is not proportional to performance near the hurdle. It is a step function, and $2m of headroom is what stands between a promote and none.
Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.