IRR vs MOIC: same fund, two very different stories
A 2.5x multiple is a 20% IRR in five years and under 10% in ten. Private equity quotes both because each hides what the other shows.
MOIC (multiple on invested capital) tells you how many times your money came back. IRR (internal rate of return) tells you how fast. The same 2.5x multiple is a 20.1% IRR if it takes five years and a 9.6% IRR if it takes ten. Private equity quotes both because each one hides what the other shows.
Fund managers like IRR because it rewards quick exits and can be flattered by financing choices. Investors who have waited years for cash like MOIC and DPI because they are harder to dress up. The right answer is to read all three together, and to know how each one is built.
How each is calculated
MOIC is total value divided by invested capital. Put in $100 million, get back $250 million, MOIC is 2.5x. Total value includes the marked value of anything still unsold, which is why a fund can report a healthy MOIC before it has returned much cash.
IRR is the single annual rate that makes the present value of all the cash flows equal to zero. With one investment and one exit it is simply the multiple raised to the power of one over the years held, minus one. With real funds, where money goes in and out at irregular dates, it needs a spreadsheet, and the answer is very sensitive to the dates.
The same multiple, different stories
Hold the multiple constant and change only the holding period:
| MOIC | 3 years | 5 years | 7 years | 10 years |
|---|---|---|---|---|
| 2.0x | 26.0% | 14.9% | 10.4% | 7.2% |
| 2.5x | 35.7% | 20.1% | 14.0% | 9.6% |
| 3.0x | 44.2% | 24.6% | 17.0% | 11.6% |
This is single-exit arithmetic and ignores fees, but the pattern holds in real funds. Time is the lever. Bain’s Global Private Equity Report 2026 puts the average holding period at about seven years. A 2.5x at seven years is a 14.0% IRR, a perfectly respectable result that looks ordinary next to the 20% the same multiple earns on the five-year plan. Our piece on Bain’s “12 is the new 5” covers the other side: Bain’s illustrative case needs 10% to 12% annual EBITDA growth to reach 2.5x over five years today, against roughly 5% in 2015.
How IRR gets flattered
Speed. A 1.5x in one year is a 50% IRR. The same 1.5x over five years is 8.4%. A fund that sells an early winner quickly can post a spectacular IRR on a small number of dollars.
Late capital calls. IRR starts the clock when investors’ money is called. If a fund borrows against its investors’ commitments (a subscription line) and calls the cash later, the clock starts later. Take a deal that returns 2.0x after five years. If the investors’ money was called at the start, the IRR is 14.9%. If a credit line funded the first year and investors paid in at the end of year one, the same $200 million of proceeds arrives four years after they paid in, and the IRR is 18.9%. The multiple has not moved. The investor has not made a cent more.
That is not a hypothetical. Albertus and Denes studied fund-level data from Burgiss and found that using a subscription line is associated with a higher reported IRR, with no gain in the multiple (the multiple was marginally lower, since interest has to be paid). The size of the effect depends on the version and sample: 2.6 percentage points in the May 2020 version of their paper, and 6.1 points in an earlier draft covered at the time by Institutional Investor. ILPA issued guidance on subscription lines in 2017, and its Principles 3.0 give examples of limits: 180 days or less, a cap of 20% of commitments, and no use of the line to fund early distributions.
Marks. Unsold holdings enter both measures at the manager’s valuation. An optimistic mark raises MOIC and IRR together, which is one reason a fund with a strong MOIC and almost no distributions deserves a second look.
How MOIC gets flattered
MOIC ignores time entirely. A 2.0x over three years and a 2.0x over thirteen years are the same number. A multiple also says nothing about how much of the money is real. A 2.2x made of 0.3x cash and 1.9x of unsold holdings is a very different asset from 2.2x of cash. That is the job of DPI, which counts only distributions.
The honest take
If a manager leads with IRR, ask for the multiple. If it leads with the multiple, ask for the holding period. If it leads with either and not DPI, ask what has actually been paid back. Then ask whether a subscription line was used and for how long.
A small test: divide the headline multiple by the years held and compare with the quoted IRR. A fund with a 2.0x multiple and a 25% IRR has either returned cash very quickly or benefited from late capital calls. Both are worth knowing.
For how the profit gets divided once returns arrive, see the distribution waterfall. For what you are paying for the privilege, see two and twenty.
Frequently asked questions
What is the difference between IRR and MOIC?
MOIC (multiple on invested capital) is total value divided by capital invested and ignores time. IRR is the annualised rate of return and depends heavily on when money goes in and comes out. A 2.5x MOIC is a 20.1% IRR over five years but only 9.6% over ten.
What is a good IRR and MOIC for a private equity fund?
There is no fixed standard. A good figure depends on vintage, strategy, fund age and whether it is gross or net of fees. Judge IRR and MOIC together, then check them against DPI, the cash actually returned, and against a public market equivalent.
Why can IRR be misleading?
Because it rewards speed and the timing of capital calls. A quick 1.5x in one year is a 50% IRR, while the same 1.5x over five years is 8.4%. Delaying capital calls with a subscription line also raises IRR without changing the multiple.
Do subscription lines inflate IRR?
Academic work finds they do. Albertus and Denes link the use of a subscription line to a higher reported IRR (2.6 percentage points in the May 2020 version of their paper) and no improvement in the investment multiple.
Which should I trust, IRR or MOIC?
Neither alone. Use MOIC to see how much was made, IRR to see how fast, and DPI to see how much has been paid in cash. If all three tell a similar story, the return is probably real.
Sources: Bain & Company, Global Private Equity Report 2026; Albertus and Denes, “Private Equity Fund Debt: Capital Flows, Performance, and Agency Costs” (Carnegie Mellon, May 2020 version); ILPA Principles 3.0 (2019). The multiples and IRRs in the table are NVPE arithmetic for single-exit examples, not data from any specific fund.
