In the book, it says the gross IRR should be calculated using cash flows each year calculated as
each yearend’s operating result - the drawdown for the next year.
I do not understand the logic behind this. Why are we using the operating result instead of distribution? Let us assume that the operating result is 0 each year, the PE didn’t lose any money and didn’t earn any either, and in logic, the IRR of the investment should be 0. But using the book’s formula, we will have a negative cash flow each year(The drawdown), but 0 operating results, which will result in a very negative IRR despite that the fund didn’t lose any money and returned all invested capital.
What am I missing here?