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Are You Reporting Fund Performance Correctly? GRR and IRR Explained

Posted on Oct 15, 2025

Fund performance reporting drives investor trust, capital raising, and competitive positioning. Investors depend on accurate metrics to judge results, while fund managers rely on them to demonstrate credibility.

Two key metrics dominate the conversation: the geometric rate of return (GRR)—also known as the time-weighted rate of return (TWRR)—and the internal rate of return (IRR). Both measure performance, but they answer different questions. To report transparently and in compliance with industry standards, you need to understand the strengths, weaknesses, and best uses of each.

 

Defining the Metrics

 

Geometric Rate of Return (GRR / TWRR)

GRR calculates the compounded rate of growth on an investment, assuming you invested a single dollar at inception and left it untouched. This measure strips out the effect of cash flows.

 

  • Strengths:
    • Removes investor cash flows and isolates manager skill.
    • Enables performance comparisons across managers, strategies, and benchmarks.
    • Communicates results clearly as a compound growth rate.

 

  • Limitations:
    • Ignores irregular contributions and distributions that dominate private funds.
    • Does not reflect what investors actually earned.

 

Internal Rate of Return (IRR)

IRR calculates the discount rate that sets the net present value of contributions, distributions, and residual value equal to zero. It directly incorporates the timing and size of cash flows.

 

  • Strengths:
    • Captures the investor’s real experience.
    • Applies naturally to closed-end funds and deal-level analysis.
    • Enjoys widespread recognition across private equity, venture capital, and private credit.

 

  • Limitations:
    • Shifts dramatically with small changes in cash flow timing.
    • Allows managers to influence optics by accelerating distributions or delaying calls.
    • Defies easy comparison across funds with different profiles.

 

Why Use One Over the Other?

Choose the metric that answers the question you want to ask:

  • Use GRR/TWRR when you want to compare managers or benchmark against public indices. This measure removes cash flow effects and reveals investment decision-making skill.
  • Use IRR when you want to measure the return journey of capital in a private fund. For closed-end structures, IRR reflects how investors actually experienced performance.

Sophisticated investors demand both. GRR highlights manager skill relative to markets, while IRR shows the investor’s realized and unrealized outcomes.

 

Add Multiples for Context

IRR tells you how timing shaped returns, but it can mislead when used alone. Two funds can report the same IRR yet produce very different value outcomes. That’s why investors rely on multiples as well:

  • TVPI (Total Value to Paid-In): Measures total value created relative to contributed capital.
  • DPI (Distributions to Paid-In): Captures realized cash returned relative to contributions.
  • RVPI (Residual Value to Paid-In): Indicates unrealized value remaining in the fund.

Multiples ground performance in cash-on-cash reality and complement the time sensitivity of IRR.

 

GIPS and ILPA Guidance

Both GIPS and ILPA set standards that encourage balanced reporting:

 

  • GIPS (Global Investment Performance Standards):
    • Require managers to use time-weighted returns (GRR/TWRR) for comparability.
    • Permit money-weighted returns (IRR) for private funds where managers control cash flows.
    • Emphasize transparency in methodologies and assumptions.

 

  • ILPA (Institutional Limited Partners Association):
    • Endorses IRR as a key measure for closed-end funds.
    • Requires multiples (TVPI, DPI, RVPI) alongside IRR to provide context.
    • Warns against presenting IRR without complementary metrics.

 

These standards converge on a simple principle: you must present both perspectives—skill and investor experience—for your reporting to meet global expectations.

 

Practical Reporting Examples

Consider two private equity funds, both with $100 million committed:

  • Fund A calls 80% of capital immediately, invests quickly, and exits early, distributing $150 million within five years.
  • Fund B calls capital gradually, invests later, and exits toward the end of the same five-year period, also distributing $150 million.

Both funds report a TVPI of 1.5x and the same DPI. However, Fund A reports a much higher IRR because investors received distributions earlier.

If you compare the funds against a public equity index, IRR offers limited value. Only GRR/TWRR enables a fair benchmark of investment decision-making. This example proves why investors need multiple views to interpret fund performance properly.

 

 

Conclusion

Neither GRR nor IRR alone provides a complete picture. GRR isolates manager skill and enables comparability, while IRR reflects the investor journey. Multiples add essential context by grounding results in cash-on-cash outcomes.

GIPS and ILPA both recognize the importance of using these measures together. For fund managers, transparency in reporting is not only a regulatory expectation but also a trust-building exercise with investors. For investors, understanding the differences empowers better decision-making.

At Pinnacle Fund Services, we ensure our clients’ performance reporting meets global standards and delivers the clarity investors expect. By combining GRR, IRR, and multiples, we help managers present their track records with integrity and precision.

Please contact David Smith at [email protected] or 1-604-559-8921 to see how Pinnacle can enhance your performance reporting.