Private equity IRR figures often look more impressive than they deserve to. Not because the underlying investments are exaggerated, but because a financial instrument called a capital call facility is being used to delay when LP cash actually enters the fund — and IRR is exquisitely sensitive to timing. Understanding this mechanism is essential for anyone evaluating private equity performance.
How it works mechanically
In a standard PE fund without a subscription line: the fund identifies an acquisition, issues a capital call notice to LPs (typically 10–15 business days in advance), LPs wire capital, and the fund uses that capital to close the deal. IRR begins ticking from the day LP cash leaves their account.
With a capital call facility: the fund identifies an acquisition, draws on its credit line to fund the deal immediately (allowing faster execution), closes the deal, and then calls LP capital days or weeks later to repay the bank facility. LP cash only leaves the LP's account when the bank gets repaid — not when the deal closes.
The IRR arithmetic
IRR is a time-weighted return metric. The longer money is held before it is deployed into an investment, the lower the IRR — because you are earning returns on capital that has been sitting idle. Conversely, the shorter the period between cash outflow and cash inflow, the higher the IRR for the same absolute return.
If a £100 million deal generates £200 million proceeds after 5 years, the MOIC is 2.0x regardless of when LP capital was called. But the IRR differs substantially: if LP capital was called at deal close, IRR is approximately 15%. If capital was called 6 months later (because the fund used a subscription line), IRR increases to roughly 17–18% — for the identical investment. No additional value was created. The difference is entirely a function of timing.
The legitimate uses
Capital call facilities have genuine operational benefits beyond IRR management. They provide certainty of funding at deal close — the GP does not need to wait for LP capital calls to be processed before closing a transaction. They reduce the administrative burden on LPs (fewer small capital calls for fees and expenses). And in competitive auction processes, the ability to close quickly without waiting for LP wire transfers is a meaningful advantage.
What LPs should do
Sophisticated LP investors now routinely request both the "reported" IRR (including facility timing effects) and the "unfacilitated" IRR (calculated as if LP capital was called at deal close). The Institutional Limited Partners Association (ILPA) published guidelines in 2017 recommending this dual reporting, and many top-tier GPs have adopted it voluntarily in response to LP pressure. If a GP is reluctant to provide the unfacilitated IRR, that reluctance itself is informative. MOIC remains the cleanest performance metric precisely because it is immune to timing manipulation — it measures what went in and what came out, unaffected by subscription line usage.