LBO

IRR and MOIC

6 min read · updated July 2, 2026

Private equity gets scored on two numbers. MOIC and IRR. If you're interviewing for a LBO seat and you fumble the difference, the conversation is over. So let's make it stick.

MOIC answers: how many times did I multiply my money? IRR answers: how fast did I earn it? They measure the same deal from two angles, and neither one alone tells the whole story.

MOIC: the simplest number in finance

Multiple on invested capital (MOIC) is just cash out divided by cash in.

$\text{MOIC} = \frac{\text{Equity proceeds at exit}}{\text{Equity invested at entry}}$

Put in $100 of equity, get back $300 when you sell the company. That's a 3.0x MOIC. Done. You'll also hear it called "cash-on-cash," same idea.

Notice what MOIC does not care about: time. A 3.0x is a 3.0x whether it took three years or thirteen. That's the number's strength (dead simple) and its blind spot.

IRR: the same return, but with a clock

Internal rate of return (IRR) is the annualized, compounded return on the equity. It's the discount rate that sets the deal's net present value to zero. For the clean case where a sponsor puts money in once and takes it out once, the relationship to MOIC is exact:

$\text{MOIC} = (1 + \text{IRR})^{n}$

where $n$ is the number of years held. Flip it around to solve for IRR:

$\text{IRR} = \text{MOIC}^{1/n} - 1$

So IRR is MOIC with a time dimension bolted on. Hold the same 3.0x for five years and you get one IRR. Hold it for ten and the IRR is roughly half.

Key insight

MOIC and IRR aren't competing metrics. They're the same profit expressed two ways. MOIC is the size of the win. IRR is the speed. A great deal is big and fast; the two numbers just tell you which lever you pulled.

The mental math: rule of 72

You will not have Excel in the interview. So you need a way to convert MOIC and hold period into an IRR in your head.

The trick is the rule of 72: an investment that doubles (a 2.0x) has an IRR of about $72 \div \text{years}$ . Double your money in 5 years and you're at roughly 72 / 5 ≈ 14 to 15%. Double it in 3 years and you're near 72 / 3 ≈ 24%.

For a 3.0x, memorize the anchor the interviewer wants: a 3.0x over 5 years is about a 25% IRR. Check it: $3^{1/5} \approx 1.245$ , so about 24.6%. Round to 25 and move on.

Here's the cheat sheet worth burning into memory:

| MOIC | Hold period | IRR (approx) | | --- | --- | --- | | 2.0x | 2 years | ~40% | | 2.0x | 3 years | ~26% | | 2.0x | 5 years | ~15% | | 2.0x | 7 years | ~10% | | 3.0x | 3 years | ~44% | | 3.0x | 5 years | ~25% | | 3.0x | 7 years | ~17% |

Look down the 2.0x rows. Same MOIC, wildly different IRR. That's the whole point of having two numbers.

Common mistake

Treating MOIC and IRR as interchangeable, or forgetting that MOIC ignores how long your money was tied up. A 2.0x in two years is a monster (roughly a 40% IRR). A 2.0x in six years is mediocre (around 12%). Same multiple, completely different deal. If a candidate quotes a MOIC and can't tell me whether it's a good return without asking the hold period, they don't understand what they just said.

What PE firms actually target

For a standard buyout, the benchmark you should quote is a ~20 to 25% IRR and a ~2.0x to 3.0x MOIC over a typical five-year hold. Those two goals are consistent with each other, which is not an accident. A 2.5x over five years lands right around a 20% IRR.

Where do those returns come from? Three levers, and you should name them in order of how much a sponsor trusts them:

EBITDA growth (grow revenue, expand margins). The most controllable, most defensible driver.
Debt paydown, using the company's own cash flow to shrink the debt and hand more of the eventual equity value to the sponsor.
Multiple expansion (sell at a higher exit multiple than you paid). This is the lever you least control, so leaning on it in an interview reads as wishful.

If you want the mechanics of how leverage and cash flow turn into those levers, see the LBO and paper LBO.

A 30-second worked example

Sponsor buys a company, writes a $200 equity check. Five years later they sell and the equity is worth $500.

MOIC is easy: 500 / 200 = 2.5x.

For IRR, don't reach for the exact root. Anchor it. A 2.0x over 5 years is ~15%, and a 3.0x over 5 years is ~25%. A 2.5x sits between them, so call it ~20%. The precise figure is 20.1%. Your eyeball estimate was good enough to talk through the deal, which is exactly what the interviewer is testing.

Why both numbers exist

A fund can juice IRR by returning capital early, say through a dividend recap, without ever growing the MOIC much. And a long, sleepy hold can post a fat MOIC while the IRR quietly rots. Limited partners look at both because each one hides what the other reveals: IRR rewards speed, MOIC rewards magnitude. Quote one without the other and you've told half the story.

Interview tip

Practice the round trip out loud until it's automatic: given a MOIC and a hold, snap to the IRR; given a target IRR and a hold, snap to the MOIC you need. Anchor on the two facts a 2.0x in 5 years is ~15% and a 3.0x in 5 years is ~25%, then interpolate. The candidate who can say "that's about a 20% IRR" in the same breath as quoting the MOIC, with no pause and no calculator, signals they've lived inside these deals. That fluency is the depth that separates you in a Superday.

Glossary

New to the lingo? Every term used above, in plain English.

MOIC (Multiple on Invested Capital): How many times an investor got their money back, calculated as cash returned divided by cash invested. A 2.5x MOIC means getting back 2.5 dollars for every dollar put in. It ignores time.
IRR (Internal Rate of Return): The annualized percentage return on an investment, which accounts for how long the money was tied up. Private equity firms often target an IRR of around 20%.
LBO (Leveraged Buyout): Buying a company using mostly borrowed money, then using the company’s own cash flow to pay that debt down over time. The classic private equity playbook.
Sponsor: A private equity firm. In an LBO the sponsor is the buyer that puts up the equity and controls the company.
Private equity (PE): Firms that raise money to buy whole companies, improve them over several years, and sell them for a profit. They often use large amounts of borrowed money to do it.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. A rough proxy for a company’s operating cash profit, before financing and accounting choices.
Exit multiple: A valuation shortcut for terminal value that applies a market multiple, such as EV/EBITDA, to the final forecast year to estimate what the business would sell for at the end.
Multiple expansion: Selling a company at a higher valuation multiple than you paid for it. It is one of the ways a buyout can create value, alongside growing profits and paying down debt.
Equity Value: The slice of a company that belongs to its shareholders. For a public company this is the market capitalization (share price times shares outstanding).

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