MOIC vs IRR
Definition
MOIC, the multiple on invested capital, is total value returned (or currently held) divided by capital invested: a 2.0x MOIC means each dollar became two. IRR, the internal rate of return, is the annualized discount rate at which the investment's cash outflows and inflows have zero net present value: the compound annual rate that would turn the money in into the money out over the actual dates. MOIC answers how much; IRR answers how fast. They diverge whenever time is involved, which is always: the same 2.0x is a 26 percent IRR over three years and a 10 percent IRR over seven. Because IRR rewards early cash flows, it can be raised without improving the multiple, by borrowing on a subscription line to delay capital calls, by selling winners early, or by recapitalizing a holding, which is why investors read the two together and increasingly weight the cash multiple.
Why it matters
Almost every private-markets platform leads with an IRR, and almost none of them show the holding period beside it. A target IRR of 15 percent on a deal expected to last two years is a 1.32x; the same target on a seven-year deal is a 2.66x, and the investor's money is at risk three and a half times as long. AltStreet's exit records report both the multiple and the IRR for each realized deal because neither alone describes what happened, and because the gap between a platform's marketed IRR and its realized multiples is where the marketing usually lives.
Common misconceptions
- •IRR is not the annual return an investor earned on their whole commitment. It is computed only on the dollars that were actually invested for the time they were invested; capital sitting uncalled earns nothing and is not in the calculation.
- •A fund's IRR does not settle as it ages in the way a multiple does. Because early cash flows dominate the calculation, a fund's IRR can stay high for years on the strength of one quick exit even as later investments disappoint.
- •MOIC is not automatically net. Deal-level MOICs quoted by managers and platforms are frequently gross of fees and carry; the net multiple investors receive is lower, often by 0.2x to 0.4x on a successful fund.
- •Two IRRs are not additive or averageable. The IRR of a portfolio is not the average of its deals' IRRs; it must be recomputed from the combined cash flows.
Technical details
Conversion table: single investment, one entry and one exit
1.5x over 1 year: 50.0 percent IRR. Over 2 years: 22.5 percent. Over 3 years: 14.5 percent. Over 5 years: 8.4 percent. Over 7 years: 6.0 percent.
2.0x over 1 year: 100 percent. Over 2 years: 41.4 percent. Over 3 years: 26.0 percent. Over 5 years: 14.9 percent. Over 7 years: 10.4 percent. Over 10 years: 7.2 percent.
2.5x over 3 years: 35.7 percent. Over 5 years: 20.1 percent. Over 7 years: 14.0 percent. Over 10 years: 9.6 percent.
3.0x over 3 years: 44.2 percent. Over 5 years: 24.6 percent. Over 7 years: 17.0 percent. Over 10 years: 11.6 percent.
The reverse reading is the useful one: a platform advertising a 15 percent target IRR is promising about 1.15x per year of holding, so 1.32x at two years, 1.52x at three, 2.01x at five.
The formulas
MOIC = (distributions plus residual value) divided by invested capital. Gross MOIC uses deal-level proceeds and cost; net MOIC uses what investors receive after fees and carry.
IRR is the rate r such that the sum over all cash flows of CF(t) divided by (1 plus r) to the power t equals zero, with t in years from the first cash flow. For one outflow and one inflow, IRR = MOIC to the power (1 divided by years), minus 1.
Modified IRR (MIRR) fixes IRR's implicit assumption that interim distributions are reinvested at the IRR itself, by specifying a reinvestment rate; it is rarely reported but is the more honest number for funds with early distributions.
Public market equivalent (PME) invests the same dated cash flows in a listed index and compares the outcome; it is the standard institutional check on whether an IRR beat the alternative.
Three ways to raise IRR without raising MOIC
Subscription lines: finance investments on the fund's credit facility and call investor capital months later. Investors' cash is invested for less time, so the IRR on their cash flows rises; the interest cost slightly lowers the multiple. Ask for IRR with and without the facility.
Selling winners early: a 1.6x realized in 18 months is a 37 percent IRR that will support the fund's headline for years, even if holding the asset would have produced 3.0x over six years and more money.
Dividend recapitalizations: borrowing at the portfolio company to pay a distribution returns cash early and lifts IRR; it adds leverage rather than value.
The common signature of all three is a high IRR beside a low DPI or a modest TVPI.
Reading platform and fund performance
Place every IRR beside its holding period and multiple. A target IRR without a target hold is not a forecast.
For realized deals, prefer the cash multiple and the dates; AltStreet's platform exit records carry both, and the deal pages report realized versus target outcomes on that basis.
For funds, read IRR beside DPI and TVPI and the vintage year, and ask whether the IRR is net and whether it excludes the subscription line.
For income products (interval funds, note programs), neither measure applies cleanly; the equivalent questions are the distribution rate, its source (income or return of capital) and the NAV trend.
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- What is the difference between MOIC and IRR?
- MOIC is a multiple with no time dimension: money out divided by money in. IRR is an annual rate that depends on when each dollar went in and came out. Two investments can have the same MOIC and very different IRRs, or the same IRR and very different MOICs. A 1.3x in one year is a 30 percent IRR; a 3.0x in ten years is about 11.6 percent.
- How do you convert MOIC to IRR?
- For a single investment with one outflow and one inflow, IRR equals MOIC raised to the power of one over the holding period in years, minus one. A 2.0x over four years is 2 to the power 0.25, minus 1, about 18.9 percent. With multiple cash flows there is no closed form; the IRR is solved numerically, and it can be undefined or have more than one solution when flows change sign more than once.
- Why do private equity funds report IRR if it can be gamed?
- Because it is the industry convention, it looks comparable to public-market returns, and it flatters early-fund performance. A fund's IRR is often highest in years two to four, when a couple of quick exits and unrealized markups dominate, and drifts down as the slower investments mature. Since 2022 many investors have shifted their attention to DPI, the cash multiple, precisely because IRR can be high while little cash has returned.
- How does a subscription line raise IRR?
- By delaying the date investors' capital is called. If a fund borrows to make an investment and calls capital from investors six to twelve months later, the investors' holding period is shorter for the same exit proceeds, so the IRR computed on their cash flows rises, while the MOIC falls slightly because the line's interest is a fund expense. Institutional investors ask for IRR both with and without the line for this reason.
- Is a higher IRR always better?
- No. A 40 percent IRR on a 1.2x deal held six months earned very little money; a 15 percent IRR on a 3.0x deal held eight years earned a great deal. Investors who need to redeploy capital may prefer speed; investors who need returns on the full commitment care about the multiple. Managers with high IRRs and modest multiples are typically selling early.
- What is a good MOIC for a private equity fund?
- Historically, median buyout funds have ended around 1.6x to 2.0x net TVPI, with top-quartile funds above 2.0x to 2.5x; venture has wider dispersion with medians below buyout and a long tail above 3.0x. Single deals inside a fund range from zero to well above 5x. Any figure should be compared with funds of the same vintage year and strategy, net of fees.