Why does IRR rise for the same MoIC when the hold period shortens? Use the 2.0x/5-year and 2.0x/3-year benchmarks in your answer.

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The answer

IRR is a time-weighted metric, so earning the same multiple of money in fewer years forces the annualized return higher. MoIC only tells you what you made in total; IRR tells you how fast you made it. The benchmarks from the lesson make it concrete: a 2.0x MoIC over five years rounds to about a 15 percent IRR, but that exact same 2.0x MoIC over just three years jumps to roughly 26 percent IRR.

The dollars coming back to the sponsor are unchanged, but compressing the hold period means the capital compounds at a much steeper annual rate to get there. That is why sponsors care so much about fast exits: a quick realization of the same multiple generates a meaningfully better IRR even though the fund's total dollar profit has not changed at all.

Sources & uses

Sources
Term Loan B400
Senior notes250
Sponsor equity370
Total sources1,020
Uses
Purchase of equity900
Refinance existing debt100
Financing & advisory fees20
Total uses1,020
Illustrative figures

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The rest of this topic

LBO returns: IRR, MoIC and the value bridge

Define IRR and MoIC. Which is time-weighted, and why does a fund need to look at both?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?Explain why debt paydown is a real source of equity value creation even when it requires no operational improvement to the business at all.The Cross-Term in a Value Bridge, ExplainedDividend Recapitalizations, Explained

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