IRR vs MOIC in Private Equity

Private equity reports returns two ways, and they answer different questions. MOIC, the multiple on invested capital, asks how many times you got your money back. IRR, the internal rate of return, asks what annualized rate that represents given the timing of cash flows. A deal can post a strong MOIC and a weak IRR if the money was tied up for a long time.

The two measures defined

MOIC is simple: MOIC = Total Distributions / Total Invested. It ignores time entirely. A MOIC of 2.5x means every dollar invested came back as 2.50.

IRR is the discount rate that sets the net present value of all cash flows to zero. It is time-weighted, so the same total proceeds earn a higher IRR if they come back sooner. In Excel, XIRR handles dated, irregular cash flows, while IRR assumes evenly spaced periods. Because IRR accounts for timing and MOIC does not, the two can rank deals differently.

Worked example

Invest 100 today. Deal A returns 250 after 3 years; Deal B returns 250 after 7 years. Both have the same MOIC, but very different IRRs.

1. MOIC for both: =250/100 returns 2.5x, identical.
2. Deal A IRR: =(250/100)^(1/3)-1 returns 0.357, about 35.7 percent.
3. Deal B IRR: =(250/100)^(1/7)-1 returns 0.139, about 13.9 percent.
4. Same 2.5x, but the shorter hold more than doubles the annualized return.

=(250/100)^(1/3)-1 returns 0.357; =(250/100)^(1/7)-1 returns 0.139.

Laying it out in a model

Build a dated cash-flow row so both measures read off the same series, with negatives for capital in and positives for distributions out.

• Lay cash flows on a single dated timeline, negative for invested, positive for returned.
• Use XIRR with the dates for IRR so irregular timing is handled correctly.
• Compute MOIC as the sum of positive flows divided by the absolute sum of negative flows.
• Show both metrics side by side, since neither alone tells the full story.

Pitfalls

Treating IRR and MOIC as interchangeable is the core error. A fund can engineer a high IRR with a fast early exit while returning little absolute capital, and a long-hold compounder can show a modest IRR yet a large MOIC. Report both.

Using IRR instead of XIRR on irregularly dated flows assumes even periods and gives a wrong rate. IRR can also produce multiple or no solutions when cash flows change sign more than once, so check the result against a sanity estimate. Finally, gross versus net of fees matters; be explicit about which you are quoting.