Define IRR and MoIC. Which is time-weighted, and why does a fund need to look at both?
General educational practice only. This is not an actual, confidential, leaked, or firm-provided interview question. Check important technical details against primary learning materials.
The answer
MoIC is total cash returned divided by total equity invested, so a 2.5x means you got back two and a half dollars for every dollar in. It is completely time-blind: a 2.5x in three years and a 2.5x in ten years are the same number. IRR is the discount rate that sets the NPV of all the deal's cash flows to zero, effectively the annualized compounding rate.
That makes IRR the time-weighted metric here: that same 2.5x MoIC is roughly a 36% IRR over three years but only about a 10% IRR over ten. A fund needs to look at both because each can badly mislead alone. A blistering IRR can come from a quick flip: a 1.3x realized in nine months prints over 40% IRR but adds barely any real money, and LPs cannot eat IRR.
On the flip side, a 3.0x over twelve years is only about a 9.6% IRR, public-return territory with a private-illiquidity penalty. Sponsors underwrite to both dimensions, typically targeting a 20 to 25% IRR and a 2.0 to 2.5x MoIC over five years, because the preferred-return hurdle is an IRR concept while returning the full fund is fundamentally a multiple concept.
Sources & uses
| Term Loan B | 400 |
| Senior notes | 250 |
| Sponsor equity | 370 |
| Total sources | 1,020 |
| Purchase of equity | 900 |
| Refinance existing debt | 100 |
| Financing & advisory fees | 20 |
| Total uses | 1,020 |
Also asked as
- You invest $150M and receive $450M after five years with no interim cash flows. Compute the MoIC and approximate the IRR without a calculator.
- Using the Rule of 72, approximately what IRR doubles your money in four years? In six years?
- A deal returns 2.0x. State the approximate IRR if the hold is 3 years and if it is 7 years, and explain why they differ.
- A sponsor takes a $75M dividend recap in year 2 of a deal and exits in year 5. Explain the effect on MoIC and on IRR, and why they diverge.
- Explain the reinvestment-rate assumption embedded in IRR and describe a situation where it materially overstates the economics of a deal. What alternative metric addresses it?
- Why can a portfolio of quick 1.3x exits show a higher IRR but be a worse fund than a portfolio of 2.5x exits over five-year holds? Which metrics would an LP use to see through this?
- Entry equity $350M. You receive a $120M dividend at the end of year 2 and $700M at exit at the end of year 5. Compute MoIC and estimate IRR to within a point or two, showing your iteration.
- A deal exits at 2.6x after 4 years. The exit then slips to year 6 at the same dollar proceeds. Quantify the IRR in both cases, and compute roughly how much larger the year-6 proceeds must be to restore the year-4 IRR.
- A fund uses a subscription line to delay capital calls by one year on a deal that returns 2.0x over what would otherwise be a 5-year LP hold. Estimate the reported IRR with and without the facility, name the costs the headline number hides, and explain how an LP should adjust.
Practice this topic with rubric-grounded grading inside IB Atlas.
Start freeGet all 125 practice prompts as one PDF.
General educational prompts with study explanations for offline review. They are not firm-provided or confidential questions.
Keep going
- Walk me through a debt schedule from free cash flow to ending debt balances. Name each step in order.
- Using the MoIC-to-IRR approximation, roughly what IRR corresponds to a 2.5x MoIC over 5 years? A 2.0x MoIC over 3 years?
- Describe the mechanical flow of an LBO operating model from revenue down to levered free cash flow, naming each line item in order.
- Interest Coverage vs Fixed Charge Ratio (FCCR), Explained
- Guide: Leveraged finance terms study guide
The rest of this topic
LBO returns: IRR, MoIC and the value bridge