Finwonk
LBOs & paper LBOs4 min read

IRR and MOIC: returns in your head

The interview question

“If you double your money in five years, what's your IRR?”

Sponsors talk in returns constantly. Interviewers want quick, confident estimates from a few memorized anchors, not long division.

The core idea

MOIC = total money back ÷ money in. IRR = the annual growth rate that turns one into the other, so it rewards getting money back sooner.

Two numbers, two questions

MOIC answers “how much did we make?”, IRR answers “how fast?”. Tripling your money is great in four years and mediocre in twelve. Funds care about both: IRR for performance rankings, MOIC because you can't spend a percentage.

Anchors worth memorizing

Worked example
Rules of thumb, using IRR = MOIC^(1/years) − 1.
  1. 12x in 3 years ≈ 26% · 2x in 5 years ≈ 15% · 2x in 7 years ≈ 10%.
  2. 22.5x in 5 years ≈ 20% · 3x in 5 years ≈ 25%.
  3. 3Rule of 72: money doubles in about 72 ÷ IRR years, so 18% doubles in roughly 4 years.
With these, you can interpolate almost any interview number within a point or two.

Estimating between anchors

Say a deal returns 2.8x over five years. It sits between 2.5x (20%) and 3x (25%), closer to 3x, so roughly 23%. Saying “about 23%” and showing that reasoning beats freezing over an exact calculation.

Run the deal yourself
IRR
15.1%
Money multiple
2.02x
$500
Equity in
$268
Debt at exit
$1,008
Equity out
Where the gain comes from
EBITDA growth+276
Debt paydown+232
Multiple change0

$100 of EBITDA, 40% of each year's EBITDA goes to paying down debt.

Try dragging holding period and watch the IRR.

Hold the deal longer and watch MOIC rise while IRR falls. That's time at work.
Watch out

A dividend recap returns cash early, so it boosts IRR noticeably but may barely move MOIC, especially if the extra debt lowers the exit equity.

Say it like this

Doubling your money over five years is roughly a 15% IRR. A useful set of anchors is 2x in three years at about 26%, 2.5x in five years at about 20%, and 3x in five years at about 25%. MOIC tells you how much money you made in total, and IRR tells you how quickly, so the same multiple over a longer period means a lower IRR.

Traps to avoid

  • ✕Calculating IRR as MOIC ÷ years (2x over 5 years is not 20%).
  • ✕Treating MOIC and IRR as interchangeable.
  • ✕Forgetting that interim cash (dividends, recaps) counts toward both, at different weights.

What they'll ask next

›What MOIC do you need for a 20% IRR over five years?

About 2.5x, since 1.2⁵ ≈ 2.49.

›Which is better: 2x in 3 years or 3x in 6 years?

By IRR, 2x in 3 (~26% vs ~20%). By MOIC, 3x. Which matters depends on whether the fund can redeploy the money quickly.

›Why might a fund prefer a lower IRR?

If a higher-MOIC deal returns much more total cash, or if capital can't be redeployed at attractive returns, total dollars can matter more than speed.

Check yourself

Question 1 of 3

Roughly what IRR is a 2x return over 5 years?

Put it all together

Cobalt Packaging · 20 min case study
Run an LBO on a packaging company

Sources and uses, five years of debt paydown, exit, IRR, and the most a sponsor could pay.