Students of corporate finance are taught the dangers of judging projects by their internal rate of return. The problem is that the attractiveness of a project depends not just on its rate of return, but on the amount of capital invested in it. You might reasonably prefer a 30 per cent rate of return on a ￡1,000 investment to a 40 per cent rate of return on a ￡10 investment. Ludovic Phalippou, a Dutch economist, has described how this problem makes the use of internal rates of return by proponents of alternative investments more misleading than helpful for investors.

Would you rather turn ￡100 into ￡140 over one year, a 40 per cent internal rate of return, or the same hundred pounds into ￡300 over four years, a 30 per cent internal rate of return? The longer-term investment is a better buy unless you believe the world is full of other opportunities to invest at a return of 40 per cent. That is why students of corporate finance are told that in appraising investment projects they ought to have in their minds a measure of the opportunity cost of the funds required for an investment project – the cost of capital.

The measurement of private equity returns is complex because the drawdown of funds, and the returns to investors, are both generally gradual processes. Rates of return on different investments vary widely, and the internal rate of return on an overall investment is not the average internal rate of return of the underlying projects.