IRR vs. MOIC

MOIC is calculated as Total Value Received divided by Total Equity Invested. A 3.0x MOIC means the investor received three dollars for every dollar invested. MOIC is simple, intuitive, and ignores the time dimension entirely. It's the headline number in PE — funds report gross and net MOICs across their portfolio. However, MOIC alone can be misleading: a 5.0x over 15 years is very different from a 5.0x over 4 years.

IRR is the discount rate that makes the net present value (NPV) of all cash flows equal to zero. It captures both the magnitude and timing of returns. PE firms target IRRs of 20-25%+. IRR is highly sensitive to timing — receiving cash earlier dramatically increases IRR. This is why PE firms use dividend recaps, quick add-on acquisitions, and other strategies to accelerate cash returns in LBO investments. However, IRR can be 'gamed' by timing and subscription credit lines.

LPs care about both metrics but weight them differently depending on context. IRR matters more for fund-level performance comparison and determines carried interest timing. MOIC matters more for assessing absolute wealth creation. A fund with 30% IRR but 1.5x MOIC (short holds, small gains) may generate less total profit than a fund with 18% IRR but 3.0x MOIC (longer holds, bigger gains). The best deals have both high IRR and high MOIC.