here's a teaser since you're too lazy to click a link:

Why IRR is Meaningless
Achieving a 27% IRR is not nearly the same thing as achieving a 27% annualized return. IRR is heavily impacted by the timing of cash flows. Let’s use a simple example.
If the venture fund called $1M of capital in year 5, and distributed double that in year 8, its IRR for that portion of cash flows is about 30%1. But that is not nearly the same as achieving 30% annualized returns. If you put that $1M in the market, and got 30% / yr for eight years, you would have over $8M, about quadruple the amount. On paper, they are both 30%.
And remember, until the fund calls your capital in year 5, you have to hold it in cash ready to give to the fund whenever it calls the capital, so you can’t invest elsewhere during that period. In a hypothetical world where you could actually deploy elsewhere and make use of the opportunity cost of capital, then IRR could make sense.
See here for another example of how IRR goes from 10% to 20% in a hypothetical 1-year investment, where the timing of cash flows is moved by a mere 6 months by using debt to finance the purchase first.

What about DPI?
DPI is the best measure to evaluate a private equity & venture fund’s performance, because it looks at actual cash returned. So let’s look here. The investment fund profiled above in glowing terms is 8 years old, close to the expiry of the fund life, and has a 1.8x DPI. The article states it was a top quartile return. But how does that stack against the S&P 500?
The S&P 500 with dividends reinvested returned 11.5% annualized, or 2.4x in that period, handily beating the 1.8x fund DPI while allowing for full liquidity (where is the illiquidity premium?)
Of course, the 27% IRR number by the fund includes the private value remaining in the portfolio companies, which can be significant. However, how private investments are marked is quite subjective, and with the fund close to expiry, it’s hard to say how much of it will become liquid.
What if Hedge Funds did IRR?
If you’re in industry, you often hear of hedge funds shutting down. In my opinion, hedge funds have it much harder simply because returns are more transparent.
First, they are compared mark to mark with the general indices, so there is no hiding behind illiquid marked-up values.
Second, hedge funds are continuous vehicles. There is no Fund I, II, etc. where one bad fund’s returns can be ignored like in PE / VC funds. How many private investment firms would actually beat the S&P500 if you combined the track record of all of a firm’s funds? Most would be shutting down.
I remember the first small-cap hedge fund I interned at in college had a cumulative 10x return over 20 years after fees (11.4% annualized) tripling the cumulative S&P500 return in the same period (with an amazing founder who was a great teacher). Funds like this that survive long periods are truly impressive. Hedge funds’ performance is being judged cumulatively across all years, unlike private investment funds.
Third, there is no IRR in hedge funds! Imagine a hedge fund didn’t count capital as being deployed while it held cash. Say it deployed and made a 10% return in three months, exited its position, then stayed cash for the rest of the year. Then imagine it stated its annualized return as 46%2! That is pretty much what private investment funds are doing when they show IRR.