MOIC vs. IRR: Which Performance Metric Matters Most for Fund Managers?

Understanding the Two Key Metrics

MOIC (Multiple on Invested Capital)

MOIC measures the total value of realized and unrealized assets divided by the initially invested capital It’s a straightforward metric that shows the absolute return on investment without considering time factors, For example

• A MOIC of 2.0x means the investment has doubled in nominal terms
• A MOIC of 1.5x indicates a 50% gain on invested capital

IRR (Internal Rate of Return)

IRR is the annualized rate of return that sets the Net Present Value (NPV) of all cash flows to zero Unlike MOIC, IRR considers both the amount and timing of cash flows, making it a more dynamic but complex metric

When to Use MOIC

MOIC is particularly valuable in these scenarios:

• Early-stage investments where exits haven’t occurred yet
• Quarterly reports where transparency is critical
• Comparing investments with similar holding periods
• Assessing illiquid or long-term assets like infrastructure or buyout deals
• Evaluating overall long-term performance of an investment

When to Use IRR

IRR becomes the preferred metric in these situations:

• Short-duration or high-turnover strategies (venture debt, credit underwriting)
• Comparing investments with different durations
• Highlighting the speed of returns (often key for limited partners)
• Shorter-cycle deals like secondaries or private credit
• More mature funds with established cash flow patterns

Limitations of Each Metric

MOIC Limitations

• Doesn’t reflect the time value of money
• Can distort performance comparisons when holding periods differ
• Treats a 2.0x return over two years the same as a 2.0x over ten years

IRR Limitations

• Assumes interim cash flows are reinvested at the same rate of return
• Highly sensitive to timing of cash flows
• Can be misleading if based on a few small and early exits
• Especially unstable in early fund life when limited data is available
• Problematic in volatile interest rate environments

Which is More Important?

According to the article, the answer depends on the investment context and strategy. MOIC is easier to calculate and interpret, making it a preferred choice for assessing the overall long-term performance of an investment. IRR, on the other hand, incorporates the timing of cash flows and provides insight into the speed of return on investment.

The relevance varies by investment type:

• Venture Capital: MOIC is often the primary metric during early stages, with IRR becoming more relevant as the fund matures and experiences liquidity events
• Growth Equity: IRR tends to become the preferred metric earlier in the fund’s lifecycle due to shorter holding periods and more predictable exits

Best Practice Approach

The current industry standard is to use both metrics in tandem:

• MOIC provides a measure of absolute value creation
• IRR reflects time efficiency and speed of returns

Limited partners typically expect fund managers to report both metrics during fundraising, with MOIC offering a high-level view of value multiples and IRR helping to assess the pace and timing of distributions.

FAQ Insights

The article provides several helpful FAQs that further clarify when to use each metric:

1. Which is most relevant? It depends on investment context and strategy – MOIC for overall long-term performance, IRR for speed of return.

2. Can MOIC be misleading? Yes, because it doesn’t account for time – a 2.0x over two years equals a 2.0x over ten years in MOIC terms.

3. How do LPs assess these metrics? They typically use both: MOIC for value multiples and IRR for distribution timing.

4. Which should be prioritized in reporting? MOIC for unrealized gains or early-stage portfolios, IRR for mature funds. Using both is now standard practice.

The key takeaway is that neither metric alone tells the complete story. Fund managers should understand the strengths and limitations of both MOIC and IRR, applying them appropriately based on their specific investment strategy, stage, and liquidity profile.