Private equity IRR fund accounting?
So I'm wondering which way PE firms calculate fund returns:
Say fund is $5b, 7 year horizon, they do 3 deals and invest the 5, sell 1 company at year 4, sell another company at year 6, sell the last deal at year 7. They return 25% on the first 2b investment sold at yr 4, 20% on the next 2b investment sold at yr 6, and 12% on the last deal sold at year 7.
Do they calculate theas the money-weighted IRR each deal that was exited? (So $2b buyout sold year 4 at 25% annual became $4.9b, $2b buyout at 20% sold year 6 became $5.9b, and 3rd investment of $1b sold year 7 at 15% became $2.6b.) Do they ascribe 40%, 40% and 20% to those IRRs? Or do they assume the first two deals money that was returned was reinvested at 25% and 20% respectively, and skew the data to make the funds IRR look higher than it is.
I know that they do that for returns since inception. Where a firm has a vintage fund that performed at 40%, and in the accounting they assume those funds were reinvested at that rate permanently, so the firms since inception IRR will almost never change.
Yeah so I'm just trying to get clarity on whether the reported numbers are manipulated or solid and how they're done, because lord knows finance is full of goofy ways of accounting that make things look better