Measuring investment performance in private equity funds

Jonathan Ng
December 13, 2022

What is the MOIC, what does it measure and what are its shortcomings as an investment performance metric?

The MOIC (also known as the multiple of money or MoM) is a measure of how a private equity investment has grown in value. It is the ratio of the total value of distributions generated versus the amount of capital invested. For example, a MOIC of 2.0x means that for every $1 you invested, the distributions generated have totalled $2 over the life of the private equity fund.

This metric is simple and easy to understand but it fails to take into account the time value of money (a fancy finance concept that says a dollar today is worth more than a dollar tomorrow due its investment return potential in the interim). For example, take a look at the following chart regarding cumulative net cashflows of two investments that both achieved a MOIC of 2.0x:

Investment A achieved the MOIC of 2.0x over a three-year period (as indicated by the positive cumulative net cashflow in year 3) whereas Investment B took five years to achieve a MOIC of 2.0x. It is clear that Investment A would be preferred over Investment B as it achieved the MOIC of 2.0x faster. However, using the MOIC as the sole measure of investment performance makes it impossible to distinguish between the two investments. This is why other metrics are needed to help provide a more comprehensive understanding of a private equity investment.

What is the IRR, what does it measure and what are its shortcomings as an investment performance metric?

IRR is defined as the “Internal Rate of Return”. Internal, in this sense, means it excludes other external facts (i.e. inflation, cost of capital etc) and ‘rate of return’ is the percentage change in value of an investment over a given period (typically, a year). So, if you invested a $1 and the IRR for the year was 15%, the investment would be $1.15.

In private equity, the IRR can be interpreted as the average annual return that is needed to generate the distributions received by an investor over the life of an investment. The IRR reflects both the timing and magnitude of the investment’s cashflows (both investments and distributions).

The problem with the IRR is that, unlike the MOIC, it cannot always be easily translated to a dollar value and that is what investors care about most. Determining a dollar value is particularly problematic for a private equity investment because the timing and magnitude of cashflows are highly irregular.

For example, take the following chart which again shows the cumulative net cashflows for two different investments.

Both have the same IRR of 15% per annum*. However, Investment C has a lower MOIC of 1.9 versus 2.0 for Investment D (the lower MOIC arises because a distribution is received from Investment C in Year 1, as indicated by the lower negative cumulative net cashflow in year 1). Based on the IRR alone, the two investments are indistinguishable. However, the MOIC of Investment D was higher and results in more cash received by the investor.

*The IRRs are the same despite the lower MOIC for Investment C because the IRR implicitly assumes that the distribution received from Investment C in year 1 is reinvested at the same rate of return as the remaining invested capital, which is not necessarily the case.


As can be seen from the two examples above, both the MOIC and the IRR have shortcomings when they are considered in isolation. However, when considered in combination they provide a fuller picture of how a private equity investment has performed, making it easier to assess its performance.

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