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L.4 · ADVANCED · 2 MIN

IRR Math: What PE Firms Actually Target

PE firms target 20–25% gross IRR and 2.0–3.0x MOIC over 3–7 years. IRR is time-weighted, so a 2.0x return in 3 years is vastly better than 2.0x in 7 years. Understanding this math is essential for evaluating PE performance.

Quiz · 5 questions ↓

Formula

MOIC = Exit Equity / Invested Equity

Compare

MOIC3-Year IRR5-Year IRR7-Year IRR
2.0x26%15%10%
2.5x36%20%14%
3.0x44%25%17%

Key point

A 2.0x MOIC in 3 years is a 26% IRR. The same 2.0x in 7 years is only 10% IRR. Time is the PE investor’s enemy — the longer you hold, the harder it is to achieve target returns.

Try it

Use the calculator to see how hold period affects IRR. A 3.0x MOIC in 5 years is 25% IRR — but in 7 years it drops to 17%. This is why PE firms are eager to exit.

Check-in

A PE fund reports 2.5x MOIC. Is this good performance?

Key insight

When evaluating PE performance, always ask for IRR alongside MOIC. A fund that reports great MOICs but takes 8+ years to achieve them may be underperforming the public markets on a time-adjusted basis.

Check-in

PE fund targets 20% IRR with a 5-year hold. A deal projects 15% IRR on base case. Do they still do the deal?
Check your understanding

Sit with the ideas.

A PE fund invests $500M of equity in a deal. At the end of year 2 the fund receives $200M via a dividend recapitalization, and at the end of year 4 it sells the company for $1.1B in equity value. What are the gross MOIC and approximate IRR?

Why:
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Other lessons in this course.

  1. 01LBO Mechanics: How Financial Sponsors Create Returns
  2. 02LBO Return Decomposition: IRR Drill
  3. 03Debt Structure in LBOs: Layers of the Capital Stack
  4. 04IRR Math: What PE Firms Actually Target— reading now
  5. 05What Makes a Good LBO Candidate?
  6. 06LBO Sensitivity and Exit Analysis
  7. 07Sponsor Returns Structure
  8. 08Cash Sweep Mechanics: How FCF Routes to Debt Paydown
  9. 09PIK Toggles and Equity Kickers: Deal-Stress Signals
  10. 10MoIC vs IRR: Drivers of Divergence and Choosing the Right Metric
  11. 11Sponsor Fee Waterfall: Management, Transaction, and Monitoring Fees
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