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You Can’t Eat IRR

Unfortunately, You Can’t Eat IRR

Since inception through Sep 2016, Apollo Global, one of the prominent private equity firms with $312 bn AUM (as of 2019), generated 39% gross IRR and 25% net IRR. That’s very good, but what does it really mean? More precisely, does it really mean anything?

Apollo’s track record is unarguably better than many other private equity funds, but I still want to understand the meaning of IRR. (by the way, I know it stands for Internal Rate of Return… thanks for my CFA Level 1 prep course)

Track Record of Apollo Global

Source: Company’s 10K

In order to understand what kind of returns you can potentially generate, I separated Apollo’s funds into two tranches – Tranche I includes I, II, IV, VI and VIII and Tranche II includes III, V, VII. Within the same tranche, there are 6-8 years gaps, which provides enough time for LPs to receive proceeds and recycle.

You start with $200 mm and invest $100 mm each in the Tranche 1 and 2. For Tranche 1, you invest $100 mm in 1990, generated 3.2x return or $320 mm proceeds, which will be committed and invested in Fund IV. Then, after Fund IV generates 1.7x, you can commit the proceeds of $544 mm in Fund VI. Of course, there should be some residual left in the previous funds, but the difference can be ignored for this analysis. You will do the same for the Tranche 2.

Tranche 1 should generate 15.9x return while Tranche 2 generates 11.2x return. Both look quite strong. If you combine both, you will make 11.8x return on $200 mm. You are left with $2.71 bn in your bank account. This is your return from 1990 to 2019, generating 9.7% net rate of return. Wait…. Isn’t Apollo’s net IRR is 25%? What is the difference?


Obviously, the difference is cash. In order to calculate IRR, you exclude undeployed capital so that the IRR figure is always higher than the annualized cash on cash return (unless you lost money).

Yeah, you can probably cook IRR, but can’t eat it, unfortunately.

P.S. By the way, do you know what kind of multiple you will get if you can actually compound with a 25% annualized return on your capital over 26 years? If you cannot believe the number, you probably got a right answer.

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