IRR vs MOIC: why the same 2x return tells different stories

One measures a multiple; the other uses the timeline

MOIC stands for multiple on invested capital. For a fully realised investment, divide total proceeds by total invested capital. Where an investment is still held, reported MOIC may include an estimated remaining value alongside distributions. A paper value is not cash already received.

IRR, the internal rate of return, is the discount rate that makes the net present value of the dated investment cash flows zero. With just one payment in and one payment out, it is the annual compound growth rate connecting those two amounts. With several cash flows, their individual dates matter.

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Worked example: the same $100 becomes $200

Consider two fictional investments. Each receives $100 at the start and returns $200 once, with no intermediate payments, fees, taxes or additional contributions. Investment A pays at the end of year three. Investment B pays at the end of year seven.

Both have MOIC = $200 ÷ $100 = 2.0x. For these single-exit cases, IRR = 2^(1 ÷ years) − 1. That gives approximately 26.0% for A and 10.4% for B. Taking longer to reach the same multiple lowers the annualised result.

Returning part of the money early changes IRR

Now change A: instead of $200 at year three, it returns $50 at year one and $150 at year three. The total is still $200, so MOIC remains 2.0x. But IRR rises to approximately 33.8% because part of the cash arrives sooner.

The calculation now solves $100 = $50 ÷ (1 + r) + $150 ÷ (1 + r)³. You cannot use the single-exit formula with the final year and ignore that first payment. Nor does 33.8% mean the investor received a 33.8% cash payment every year: the actual payments are still $50 and $150.

These timelines isolate timing. They do not establish that A is a better opportunity: risk, the size of the investment, available alternatives and what happens to returned cash are separate questions.

Check what the reported numbers include

Before comparing funds, ask whether returns are gross or net of fees and carried interest, whether they describe the fund or an individual deal, and how unrealised holdings are valued. Compare cash actually contributed and distributed on their dates, rather than substituting the fund's launch date for every investment's holding period.

ILPA's performance template separates fund-level and portfolio-level reporting and captures the corresponding cash flows. That is a useful reminder: a percentage without its calculation basis leaves important information out.

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Misconception: the highest IRR always creates the most value

A quick small gain can produce a high annualised rate while adding few dollars. A larger multiple over a longer period can produce more total proceeds but a lower IRR. Read the multiple, timing and scale together; none of them measures risk by itself.

IRR is also less straightforward for unusual cash flows that switch repeatedly between payments out and receipts in: there can be multiple solutions or no useful solution. The examples here use a single initial outflow followed by inflows, so that complication does not arise. This is an explanation of return arithmetic, not an investment recommendation.

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