Syndicators love the IRR

[Russell Gronsky]

Why do syndicators focus so hard on IRR? If you have a specific return you are targeting, wouldn't PV be a better metric to calculate?

[Bill F.]

@Russell Gronsky

IRR and NPV both use the same underlying formula to arrive at a result, they just solve for different things.

As you are well aware, the NPV of a project is the PV of all future cash flows discounted at a given rate less the costs of the project. Positive NPV project are good. PV-costs=NPV

IRR is discount rate that makes the PV of the cash flow minus the costs equal 0. PV=Costs

In your case, if you want an 18% return, don't invest in anything with less than an 18% IRR.

As for why GPs love IRR. It is a single number, which is an easy selling point. 'this deal has x% IRR' is way easier to pitch than ' at a discount rate of a% this project has an NPV of $x, but at b% discount rate, we have an NPV of $y'

A dirty little secret of deals this space and size is that most investors and a lot of GPs are super finance savvy and don't truly get the intricacies of these calculations, just look at the wide spread use of equity multiple. So when you can pitch a single number, which you control, it makes the GPs job of capital raising far simpler. 

Another reason why PV isn't used in this space is that most investors have no idea what they would use as a discount rate. In the case you have described, the discount rate is in essence the cost of capital, which is not something a lot of people who invest $50-150K think about.  

Both IRR and NPV rely on a host of assumptions to arrive at a monthly/yearly cashflows number. As the saying goes, Garbage in, garbage out. The assumptions used to arrive at the cash flows are far more important than the outputted numbers. How the GP generates their cash flows projections will tell you far more about their abilities than the number.