Few aspects of the private equity industry generate more confusion than the measurement of returns. This claim can be illustrated with examples from many corners of the industry.

*A private equity group raises a fifth fund, claiming in its placement memorandum that its fourth fund (from which only one investment has been realised) has an internal rate of return (IRR) of more than 50 per cent. Within a year of the closing, there is a series of write-downs that brings the return of the fourth fund down to the single-digit level.* An institutional investor, having signed a partnership agreement which calls for the share of profits going to the private equity investor to vary with the internal rate of return of the fund, discovers that the fund actually has two different IRRs, one positive and one negative. Many millions of dollars depend on which rate of return is selected.