Pooled Internal Rate of Return (PIRR)

What Is the Pooled Internal Rate of Return (PIRR)?

Pooled internal rate of return (PIRR) is a method of working out the overall internal rate of return (IRR) of a portfolio that comprises of several projects by joining their individual cash flows. To work out this, you really want to realize the cash flows received as well as the timing of those cash flows. The overall IRR of the portfolio can then be calculated from this pool of cash flows.

The pooled internal rate of return can be communicated as a formula:
$\begin&IRR\ =\ NPV\ =\ \sum^T_\frac{(1+r)^t}\ -\ C_0\ =\ 0\&\textbf\&IRR\ =\ \text\&NPV\ =\ \text\&C_t\ =\ \textt\&r\ =\ \text\end$

Figuring out the Pooled Internal Rate of Return

The internal rate of return (IRR) is a measurement utilized in capital budgeting to estimate the expected return on likely investments. The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a specific project equivalent to zero. IRR estimations depend on a similar formula as NPV does yet it sets the NPV at zero level, not at all like the other discount rates. The pooled IRR is the rate of return at which the discounted cash flows (the net present value) of all projects in the aggregate are equivalent to zero.

The pooled internal rate of return (PIRR) can be utilized to find the overall rate of return for an entity running various projects or for a portfolio of funds each delivering their own rate of return. The pooled IRR concept can be applied, for instance, on account of a private equity group that has several funds. The pooled IRR can lay out the overall IRR for the private equity group and is better appropriate for this purpose than say average IRR of the funds, which may not give an accurate image of overall performance.

PIRR Versus IRR

IRR registers the return of a specific project or investment in light of the expected cash flows associated with that project or investment. In reality, be that as it may, a firm will embrace several projects at the same time, and it needs to figure out how to budget its capital among them. This issue of concurrent projects is particularly common in private equity or venture capital funds that give capital to several portfolio companies at some random time. While you can register separate IRRs for every one of these projects, pooled IRR will portray what is happening considering each of the projects simultaneously.

Limitations of PIRR

Similarly as with IRR, PIRR can be deceiving whenever utilized in seclusion. Contingent upon the initial investment costs, a pool of projects might have a low IRR yet a high NPV, really intending that while the pace at which the company sees returns on a portfolio of projects might be slow, the projects may likewise be adding a great deal of overall value to the company.

The other issue that is unique to PIRR is that since cash flows are pooled from different projects, it might hide inadequately performing projects and quiet the positive effect of lucrative projects. Both individual and pooled IRR ought to be led to distinguish the presence of any exceptions.

Highlights

• Pooled IRR (PIRR) is a method for working out the returns from a number of concurrent projects wherein an IRR is calculated from the aggregated cash flows of all the cash flows.
• The pooled IRR is the rate of return at which the discounted cash flows (the net present value) of all projects in the aggregate are equivalent to zero.
• The pooled IRR concept can be applied, for instance, on account of a private equity group that has several funds.