What’s MOIC? The Ultimate Guide to Understanding Multiple on Invested Capital

Ever heard investors tossing around the term “MOIC” and felt completely lost? Don’t worry – you’re not alone! As someone who’s spent years navigating the complex world of private equity investments, I’ve seen many smart people scratch their heads when MOIC comes up in conversation.

Today, I’m breaking down everything you need to know about Multiple on Invested Capital (MOIC) in simple, straightforward terms. Whether you’re considering private equity investments or just want to understand investment performance metrics better, this guide has got you covered!

What is MOIC (Multiple on Invested Capital)?

MOIC, or Multiple on Invested Capital, is one of those investment metrics that sounds complicated but is actually pretty straightforward Simply put, MOIC measures how much value an investment has generated relative to its initial cost

In other words, it shows you how many times over you’ve multiplied your original investment If you invest $100 and end up with $250, your MOIC would be 25x – meaning you’ve made 2.5 times your initial investment.

This metric is particularly popular in private equity and venture capital circles, where it’s used to evaluate the performance of investments in portfolio companies or funds. It’s also commonly referred to as “Equity Multiple” or “Multiple of Money (MoM)” or “cash-on-cash return” – so don’t get confused if you hear these terms used interchangeably!

The MOIC Formula: Keeping It Simple

The formula for calculating MOIC is refreshingly straightforward:

MOIC = Total Cash Inflows ÷ Total Cash Outflows

Breaking this down:

• Total Cash Inflows: The money you get back from the investment (including both realized proceeds from exits and current unrealized value)
• Total Cash Outflows: The money you put into the investment (your initial capital contribution)

For example, let’s say a private equity firm invests $20 million to purchase a company, and after five years, sells it for $80 million. The MOIC calculation would be:

MOIC = $80 million ÷ $20 million = 4.0x

This means each dollar invested grew to $4.00 over the five-year period – a pretty impressive return!

Realized vs. Unrealized MOIC: What’s the Difference?

When discussing MOIC, we often differentiate between realized and unrealized returns:

• Realized MOIC: This refers to returns from investments that have already been sold or exited. The cash is in hand, and the profits are locked in.

• Unrealized MOIC: This includes the expected value of investments still in the portfolio that haven’t been sold yet. These values can still fluctuate, so they’re not certain.

When evaluating a fund’s overall performance, the formula adjusts slightly:

MOIC = (Realized Value + Unrealized Value) ÷ Total Initial Investment

Understanding this distinction is crucial when assessing investment performance, especially for funds that still have active investments in their portfolio.

What’s a Good MOIC?

We all wanna know – what MOIC should I be aiming for? Is my investment performing well? Here’s a general rule of thumb:

• Higher MOIC: Generally viewed positively because it indicates profitable investments
• Lower MOIC: Typically seen as negative as it suggests the investment might not meet target returns or even recoup the initial capital

In the private equity world, firms typically target MOICs between 2.0x and 4.0x for their investments, depending on the risk level, industry, and holding period. But remember, what constitutes a “good” MOIC can vary widely based on:

• Investment strategy
• Risk profile
• Industry sector
• Holding period
• Market conditions

MOIC vs. IRR: Understanding the Difference

MOIC and IRR (Internal Rate of Return) are the two most common performance metrics in private equity. While they’re related, they measure different aspects of investment performance:

Here’s a simple example to illustrate the difference:

• Investment A: 2.0x MOIC over 3 years = ~25% IRR
• Investment B: 2.0x MOIC over 5 years = ~15% IRR

Both investments doubled your money (2.0x MOIC), but Investment A did it faster, resulting in a higher IRR.

For those preparing for private equity interviews, here are some common MOIC to IRR approximations that might be helpful to memorize:

• 2.0x MOIC in 3 Years ≈ 25% IRR
• 2.5x MOIC in 3 Years ≈ 35% IRR
• 3.0x MOIC in 3 Years ≈ 45% IRR
• 2.0x MOIC in 5 Years ≈ 15% IRR
• 2.5x MOIC in 5 Years ≈ 20% IRR
• 3.0x MOIC in 5 Years ≈ 25% IRR

MOIC vs. TVPI: What’s the Difference?

Another metric you might encounter is TVPI (Total Value to Paid-In capital). It’s similar to MOIC but has a slight difference:

• MOIC divides the total value by the initial investment
• TVPI divides the total value by the paid-in amount

When a fund is fully funded and all capital calls have been met, TVPI equals MOIC. However, when investors aren’t fully paid-in yet, TVPI will be greater than MOIC because it considers only the capital that has actually been contributed so far.

An Example of MOIC in Action

Let’s walk through a practical example to illustrate how MOIC works in a real-world scenario:

Imagine a private equity firm acquires a company on December 31, 2021 (Year 0), contributing $100 million in equity.

Let’s say the recovery percentages are:

• Year 1: 100% (value = $100 million)
• Year 2: 150% (value = $150 million)
• Year 3: 200% (value = $200 million)
• Year 4: 250% (value = $250 million)
• Year 5: 300% (value = $300 million)

The MOIC at different exit years would be:

• Year 1 Exit: 1.0x MOIC (just breaking even)
• Year 2 Exit: 1.5x MOIC
• Year 3 Exit: 2.0x MOIC
• Year 4 Exit: 2.5x MOIC
• Year 5 Exit: 3.0x MOIC

If the firm exits in Year 5, the 3.0x MOIC indicates that the initial investment tripled in value over the five-year period – a favorable outcome for the private equity firm!

Limitations of MOIC

While MOIC is a valuable metric, it’s not perfect. Here are some limitations to keep in mind:

• Ignores time value of money: MOIC doesn’t account for when cash flows occur, which is a fundamental principle in finance
• Doesn’t consider risk: Two investments might have the same MOIC but vastly different risk profiles
• Can be manipulated: By extending holding periods or selective reporting
• Doesn’t account for fees: Unless specifically calculated as “net MOIC,” it typically doesn’t reflect fees, expenses, or carried interest

That’s why investors usually look at both MOIC and IRR together to get a more complete picture of investment performance.

Gross vs. Net MOIC: What Investors Need to Know

When evaluating private equity investments, it’s crucial to understand the difference between gross and net MOIC:

• Gross MOIC: Calculated before deducting fees, expenses, and carried interest
• Net MOIC: Calculated after deducting all fees, expenses, and carried interest

The difference between gross and net MOIC can be substantial – sometimes reducing returns by 20% or more! As an investor, you should always focus on the net MOIC, as that’s what you’ll actually receive.

Using MOIC in Your Investment Analysis

So how can you use MOIC in your own investment analysis? Here are some practical applications:

• Comparing different investment opportunities: MOIC provides a quick way to compare the potential total return of different investments
• Assessing fund manager performance: Track record of generating strong MOICs can indicate skilled management
• Setting investment targets: Establish minimum MOIC thresholds for different types of investments
• Portfolio planning: Balance higher-MOIC, higher-risk investments with more stable ones

Remember, MOIC works best when used alongside other metrics like IRR, cash-on-cash yield, and risk assessments.

Wrapping Up: Why MOIC Matters

MOIC is one of those rare financial metrics that’s both powerful and easy to understand. While it has limitations (especially regarding time value of money), it provides a clear, intuitive picture of an investment’s total return potential.

As private markets continue to grow and attract more investors, understanding metrics like MOIC becomes increasingly important. Whether you’re evaluating a private equity fund, considering a venture capital investment, or just trying to assess the performance of your own investment portfolio, MOIC gives you a straightforward way to measure how effectively your capital is being multiplied.

Do you use MOIC in your investment analysis? Have questions about how it works in specific scenarios? Drop a comment below – I’d love to hear your thoughts!

A “good” Multiple on Invested Capital (MOIC) is generally considered to be greater than

$1.0x$

, indicating a profitable investment, with a specific benchmark often set at

$2.0x$

to

$3.0x$

or higher for venture capital and private equity.

MOIC to IRR Table

MOIC is calculated by dividing the Total Value of the Investment by the Initial Capital Invested. The total value includes all returns, both realized and unrealized, such as cash, dividends, and the current value of the investment. The initial capital is the total amount initially put into the investment.