IRR Models

Generally, an IRR calculation is part of an LBO model and its purpose is to determine that annualized return rate on invested capital. Rather than go into detail just go to wiki or investopedia and then come back and ask specific questions.

PE firms want to realize an IRR of > 20%, using a lot of leverage. This can be executed through an LBO. If a firm has stable (free) cash flows, it can repay its debt obligations. At the same time, equity will rise, because debt is declining. Given the time horizon (usually 5 year), the IRR can therefore be calculated by the difference in equity value from the starting point to the exit point, adjusted for the time horizon. Starting point and exit point can be determined through an multiple analysis btw.

It depends how the waterfall structure of the PE firm is structured. The key point here is IRR needs to beat the hurdle rate.

I think Junkbondswap pretty much summarized it. I dont know what the hell you other clowns are talking about... beginning equity and ending equity and waterfall structure of the PE firm? Save the bullshit for your class discussions.

Marcus Halberstram stfu noob. The IRR is a time-weighted return expressed as a percentage. You calculate this annualized return over your invested equity. That is why I said beginning and ending.