Could you tell me what is irr and if a private Equity company were to double if its investment in five years what the approximate irr would be also what levels could you use to increase, irr? Okay, so let me start with the first part of your question. I are all is the internal rate of return of a private Equity investment and measures the annual compounded return from the investment.
It's a widely used metric to measure performance and it also takes time into consideration. So if the initial investment doubled in five years that irr would be approximately 15% Possible levers you can use to increase irr from an investment through three value creating levers.
These are leverage you can increase the amount of debt in the deal. This would increase Leverage.
You could reduce the purchase price that the private Equity company has to pay to buy out.
And then the final one is operational performance. You could increase the company's growth rate or ebitdar margin to enhance the operating income or ebitdoll of the company.
Irr is an important metric in private equity and probably the most used measure of performance within the industry interviewers are looking to see whether you are familiar with the concept and Mathematics behind it. They are testing your knowledge of the metric as well as how you think on your feet. When asked to technical question, if you have not memorized approximate IRS for commonly used time frames and multiple returns something that is recommended you do before your interview. You will have to attempt to calculate an approximate number they are not looking for exact numbers here and there are multiple ways other than memorizing irr's to find approximations the candidate with this answer demonstrates that they are aware of this important performance indicator and know approximately what doubling in investment in five years would amount to the candidate then addresses the levers that can improve irr by walking through the PE value creation levers.
