The Hidden Truth About Private Market Returns

Why IRR Can Mislead Private Investors

Private equity returns can be deceiving. Analysis from Ares Management shows that two funds reporting the same internal rate of return (IRR) can leave investors with dramatically different dollar outcomes—a gap driven more by fund structure than manager skill.

Inside the Research

The paper “Evaluating Evergreens“ tackles a critical question for wealth advisors and investors: how do perpetual-life “evergreen” funds compare with traditional finite-life “drawdown” funds, and how should returns be evaluated when the two structures report performance in fundamentally different ways?

Author Brendan McCurdy goes beyond headline numbers, digging into the mechanics of how capital actually works in each structure—cash flow timing, deployment patterns, and the real experience of investors committing capital to private markets.

What the Data Revealed

Same IRR, Very Different Dollar Outcomes

The research presents a striking hypothetical: two funds, both generating 15% IRRs over 10 years, but with completely different results.

Fund A (Traditional Drawdown): Turns a $100 commitment into $216—a $116 gain, or about a 2.2x multiple on committed capital.​

Fund B (Evergreen): Turns the same $100 into $405—a $305 gain, or about a 4.1x multiple on committed capital.

Both funds report a 15% IRR, yet one delivers roughly 2.6 times the dollar profit of the other.

The explanation is simple but critical: it all comes down to how much of your capital is actually invested—and compounding—for how long.

Why Deployment Drives Returns

Traditional drawdown funds operate with significant uninvested balances. On average, the research found that 56% of committed capital remains uninvested over a typical fund’s life—equivalent to about 5 years and 7 months of your money sitting in cash or public markets instead of in the private strategy you selected.

Evergreen funds, by contrast, remain nearly fully invested throughout the holding period, allowing continuous compounding of returns.

When the authors modeled a $1 million commitment to each structure over 10 years, the evergreen fund produced about $1.5 million more than the drawdown fund, even though both reported the same IRR. When the uninvested capital in the drawdown structure was assumed to earn 4.25% in cash, the evergreen advantage grew to almost $2 million.​

The Multiple Equivalency Revelation

Perhaps most useful for practitioners is the equivalency table the authors developed. They found that an evergreen fund earning 11.6% annually can deliver the same 3x multiple on committed capital as a drawdown fund with a 19.6% IRR, assuming uninvested capital in the drawdown structure earns market returns.

For investors accustomed to chasing eye‑catching IRRs in drawdown funds, this reframes the conversation entirely: a “lower” return in an evergreen structure may deliver identical—or even better—dollar outcomes

Key Investor Takeaways

1. Look Beyond IRR to MOCC

IRR measures returns only on dollars currently at work. For a complete picture, investors should examine Multiple on Committed Capital (MOCC)—which accounts for all capital committed, including the portions that sit uninvested waiting to be called or after being distributed back.

The research introduces “annualized MOCC” as a practical tool for comparing across structures, effectively translating drawdown IRRs into their evergreen equivalents.

2. Compounding Matters More Than You Think

The study shows that being fully invested is not just marginally better—it is transformational. Over long horizons, the gap between being nearly 100% deployed in an evergreen structure and only 44% deployed on average in a drawdown structure compounds into what can become life‑changing differences in wealth.

3. Key Advantages of Evergreen Funds

• Faster and fuller deployment: Capital begins compounding immediately—no waiting for capital calls.

• Liquidity and flexibility: Regular redemption windows (5–10% quarterly or semiannually) allow gradual rebalancing.

• Operational simplicity: No capital calls, lower minimums, and simpler tax reporting (1099s or short K‑1s).

• Portfolio transparency: Investors can see the live portfolio before investing, reducing “blind pool” risk.

• Continuous compounding: Unlike drawdowns, capital remains fully invested and growing.

• Immediate diversification across a broad portfolio.​​

• Mitigate the J‑curve effect, as investors typically pay fees on invested capital rather than on total committed capital (in contrast to drawdown funds that typically charge on commitments).​

• More familiar reporting conventions, including monthly NAVs and, in some cases, daily pricing (as with Cliffwater’s private credit and private equity interval funds).​​

• Reduced administrative burden: no capital calls, shorter subscription documents, and less operational complexity.​

The Bottom Line

The research provides a framework for making informed comparisons between structures that report returns in fundamentally different ways.

The key insight? Focus less on headline IRRs and more on how much of your money is actually compounding. Evergreen structures that stay fully invested often turn “lower” reported returns into substantially higher real‑world wealth.

For many investors, an evergreen fund earning 12% can outperform a drawdown fund reporting 25%, once you factor in uninvested cash drag. The new MOCC framework makes that difference visible—and actionable.

Larry Swedroe is the author or co-author of 18 books on investing, including his latest Enrich Your Future, his personal favorite

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