when reporting investment values between transactions. Typically, an investment will be held at cost, or at the value of the most recent significant transaction by an outside investor. When an investment goes public, is sold, or goes out of business, the obvious valuations can be applied. In addition, general partners often have wide discretion in applying modified valuations when circumstances appear to warrant doing so. Thus, if there are no transactions in a private business for some period of time, the valuations reported to investors can be seriously out-of-date. For example, consider the case of a business that is able to finance expansion out of its own cash flow. Additional rounds of investment may not be required for some years, so that the reported valuation may not change at all while the true economic value of the business increases markedly. By contrast, a failing business may not be able to raise additional capital, and so its valuation might be held at cost until it ceases operations. In an entire partnership, it is unusual for all of the investments to have transactions at any one time, so the valuation of the partnership as a whole is almost always out-of-date to some extent. The only times at which the valuations of a partnership can be wholly relied on are at inception (when no investments have yet been made) and at termination (when all investments have been liquidated and the proceeds distributed). Since private equity valuations are always out-of-date, periodic return series for single investments or partnerships are highly unreliable. And, since periodic return series are highly unreliable, so too are estimates of mean return, volatility, or covariance with any other asset. As a result, the most commonly quoted measure of performance in private equity is internal rate of return (IRR), which is computed from cash flows (whenever they occur) and the residual value of the investments on the date of calculation. By the time an investment or partnership is fully liquidated, the IRR will be reliable, since it uses only fully observable values (cash flows and dates). However, it is of limited utility compared with periodic returns, since it cannot be inferred when or how the gains were actually made. Because IRR can be reliably measured over the life of a partnership, but periodic returns and risk statistics generally cannot, it can be difficult for private equity investors to fully understand the risk/return trade-offs being made by fund managers. Sometimes, investors may be led to concentrate only on IRR, without asking what the economic sources of risk and return in a partnership might be. Because good statistics are hard to come by, successful private equity investing requires close attention to the economic fundamentals of the underlying investments. Since private equity is exactly that-private-there is no central reporting organization for valuation or returns. Indeed, private equity partnerships often view their valuation and return statistics as proprietary information, and may have prohibitions against sharing data. There are a few organizations that try to compile data about IRR across the private equity industry, but only a fraction of partnerships share data in this way.1 Thus, estimates of risk and return in private equity as a class are quite unreliable compared with their counterparts in public markets. typically these organizations report statistics of IRR-mean, median, standard deviation, and quartiles are common. It should be noted that standard deviation of IRR is not an estimate of volatility, as it measures dispersion of return among partnerships rather than through time.