RATZ IRR: Performance Measurement in the Absence of Cash Flow Data

Abstract

In this article, the authors introduce a methodology to estimate portfolio internal rate of return (IRR) from portfolio constituents when only the IRR and the money multiple of the constituents are available. They call this methodology the reconstructed average time zero (RATZ) IRR. A deviation from the portfolio’s true IRR will remain because not all cash flow information is available. They derive an analytical expression of the difference between the RATZ IRR and the portfolio IRR. The authors provide empirical evidence about the quality of the estimator using a proprietary dataset from a large private equity investor. Furthermore, by applying the RATZ IRR, they present an overview of the portfolio construction and performance of the private equity programs of U.S. pension funds.