IRR vs MOIC: the two return metrics every PE interview will ask

PE interviews almost always ask about both. Most candidates know the definitions but can't explain when each one matters — or do the math on the spot. Here's what you actually need to know.

1. What MOIC means

MOIC stands for Multiple on Invested Capital. The formula is simple:

MOIC = Exit equity / Entry equity

Example: you put in $200M, you get back $600M. MOIC = 3.0x.

That's it. MOIC tells you how many times you multiplied your money. It says nothing about how long it took. A 3x that took 3 years and a 3x that took 12 years are the same MOIC — which is why MOIC is a blunt instrument. It's useful for communicating returns to LPs in plain English ("we made 3x on that deal"), but it strips out time.

2. What IRR means

IRR — Internal Rate of Return — is the annualized return on your investment. It's the discount rate that makes the net present value of all cash flows equal to zero. In plain English: it converts your MOIC into a per-year number, accounting for how long the money was at work.

IRR is harder to game than MOIC because it penalizes you for holding too long. A deal that returns 3x but takes 10 years to exit has a far lower IRR than one that returns 3x in 4 years. That's why IRR is the primary return metric for most PE funds — it captures time value of money, which MOIC ignores.

Rough IRR formula for a single cash flow:
IRR ≈ (MOIC)^(1/years) − 1

3x over 5 years: (3)^(1/5) − 1 = 1.246 − 1 = ~24.6% IRR

3. MOIC × Hold Period → Approximate IRR

Memorize a handful of these. They come up in paper LBOs and sanity checks.

MOIC	3 years	5 years	7 years
2.0x	~26% IRR	~15% IRR	~10% IRR
3.0x	~44% IRR	~25% IRR	~17% IRR
4.0x	~59% IRR	~32% IRR	~22% IRR

The pattern: doubling the hold period roughly halves the IRR for the same MOIC.

4. When PE firms care more about MOIC vs IRR

This depends on fund size and LP base:

Large buyout funds care most about IRR because their LPs (pensions, endowments) have capital efficiency targets. A 25% IRR that returns capital in 4 years lets them redeploy. A 15% IRR tied up for 8 years doesn't.
Small and mid-market funds sometimes lean on MOIC because their hold periods are less predictable and their LPs have longer horizons.
VC funds often cite MOIC first — "we returned 10x on that Series A" — because the timing of VC exits is lumpy and hard to predict at entry. IRR is still tracked, but it's less central to how GPs talk about wins.

5. The gotcha: a higher MOIC can mean a worse IRR

This is the trap candidates walk into. Assume two investments:

Deal A: 4x MOIC, 10-year hold → IRR = (4)^(1/10) − 1 ≈ 14.9%

Deal B: 3x MOIC, 4-year hold → IRR = (3)^(1/4) − 1 ≈ 31.6%

Deal B has a lower MOIC — but more than double the IRR. If your fund's hurdle rate is 20% and you're judging deals on IRR, Deal A fails and Deal B clears easily. This is why LBO models always show both metrics and why sponsors set a target IRR (usually 20–25%) in addition to a MOIC floor (usually 2.5–3x).

Practice building the model behind these numbers

Knowing the formulas is one thing. Building the model — entry assumptions, debt schedule, exit — so the numbers fall out naturally is another. FundSim's LBO simulator gives you every input on one screen with instant feedback.

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