All Forum Posts by: Julie N.

Thanks everyone! 

Are there differing opinions here then on the reinvestment portion or am I so confused that I can’t tell everyone is saying the same thing lol

@Nick Peters does your statement contradict Brian’s on this point regarding reinvestment?

”IRR, on the other hand, measures cash flows. So in your IRR example you are showing cash flow every year, which means that money is distributed to you and there is no compounding on the distributed dollars because they are no longer in the investment."

Does IRR assume reinvestment at the IRR rate for another investment or not then?

Thanks for the clarification this makes a lot of sense. So a good definition of IRR is an annualized compounding rate of return that takes into consideration the timing of periodic cash flows but does not make any assumption about the reinvestment return of income distributions over the hold?

@Brian Burke I read your book and it was hugely helpful. Any insight here is greatly appreciated!

Thanks for the response!

I told myself I wanted to have a firm grasp on IRR and have been researching online. I feel like it's easy to over complicate this and I've confused myself unfortunately :)..

The definition of IRR being the discount rate that makes NPV equal to 0 makes sense to me. The concept of NPV and discounting cash flows makes sense to me. What I don't understand is when IRR is referred to as a compounding annual rate of return.

I read this example and it threw me off.. "Abel sells land for $20,000 that he bought 4 years earlier for $10,000. The internal rate of return was 19%. That is the annual rate which compound interest much be paid for $10,000 to become $20,000 in 4 years"  

What about a scenario with multiple cash flows? For instance with an investment then with 5 years cash flows yielding 26.9% IRR.

Shouldn't you in principal be able to compound $957k annually by 26.9% and arrive at the same total amount as the total of the cash flows received over the hold? In the example above I know I am missing something as the total of the cash flows is $2.788M vs the simple compound interest of $957,900 over 5 years at 26.9557% is $3.159m.

Thanks for helping me clear this up!

Thanks @Brian Burke. Very helpful. I’m ordering the book! How often do you see deals where the gp offers a straight split? No pref. Example like 80/20 day 1 cash flows. Is the gp interest considered a carried interest by definition? It wouldn’t be a promoted interest since it’s day 1 , correct?

Thanks for the response. Yes; gift was the wrong wording. I should say a greater interest in the deal than their capital contribution. For instance if it was a 90% lp 10 % gp contribution for the initial equity plus the sponsor receives an additional 20% day one carry on all income.

For further clarification, is it common on a pref then split deal for the sponsor to receive cash flow (after pref is paid) but before the lp has received a full return on initial invested captial?