The term MOIC, which stands for “Multiple on Invested Capital,” is used to quantify investment returns. It compares the value of an investment to the initial investment amount at the time of exit.
The MOIC metric is especially common in the private equity sector, where it is used to monitor the performance of investments made by funds and compare returns between various companies.
Understanding MOIC (Multiple on Invested Capital)
MOIC, or Multiple on Invested Capital, is a crucial metric in the private equity industry, measuring the value generated by an investment relative to its initial cost. It helps assess the performance of individual investments, compare returns across different funds and evaluate the overall success of a private equity firm.
Key Takeaways:
- MOIC measures the value generated by an investment relative to the initial investment.
- It is a simple and easy-to-calculate metric, making it a valuable tool for quick assessment.
- MOIC is widely used in private equity to evaluate the performance of funds and investments.
Why is MOIC Important in Private Equity?
- Simplicity and Ease of Calculation: MOIC is a straightforward metric that requires minimal data and calculations, making it readily accessible and understandable for investors and analysts.
- Quick Assessment Tool: MOIC provides a quick snapshot of an investment’s performance, allowing for easy comparisons across different investments and funds.
- Industry Standard: MOIC is a widely accepted and recognized metric in the private equity industry, making it a valuable tool for communication and benchmarking.
Limitations of MOIC:
- Time-Weighted Returns: MOIC does not consider the timing of cash flows, making it less informative for investments with uneven cash flow patterns.
- Unrealized vs. Realized Value: MOIC can be calculated based on unrealized or realized value, requiring careful consideration of which version is being used for accurate comparisons.
MOIC Formula and Calculation:
MOIC = (Realized Value + Unrealized Value) / Initial Investment
- Realized Value: The total capital from investments that have been exited.
- Unrealized Value: The total value of remaining active investments that have not been liquidated.
- Initial Investment: The total initial investment cost.
MOIC vs. IRR:
While MOIC focuses on the absolute value generated, IRR (Internal Rate of Return) considers both the value and the time it took to generate that value. Both metrics are important for a comprehensive understanding of investment performance.
MOIC vs. TVPI:
TVPI (Total Value to Paid-In Capital) is similar to MOIC, but it divides the total value by the paid-in amount instead of the initial investment. This difference is relevant when investments are not fully funded.
MOIC is a valuable tool for assessing investment performance in private equity. By understanding its strengths and limitations, investors and analysts can gain valuable insights into the profitability and risk of potential investments.
Additional Resources:
- Moonfare: Multiple on Invested Capital (MOIC) Definition
- Wall Street Prep: Multiple on Invested Capital (MOIC)
Keywords: MOIC, Multiple on Invested Capital, Private Equity, Investment Performance, IRR, TVPI
LBO Model Entry Assumptions
Assume, at the close of 2021, that a company completed an LBO acquisition on December 31, 21.
The private equity firm (or financial sponsor) had to provide $100 million in cash to purchase the target company. e. the sponsor’s equity contribution.
Our LBO returns schedule needs to account for the $100 million initial cash outlay in Year 0, which was formatted with red as the font color for illustrative purposes.
- LBO Transaction Closing Date = 12/31/21
- Sponsor Equity Contribution (and Initial Cash Outlay) = $100 million
Given the limitations of the MOIC metric and the requirement to use it in conjunction with the IRR, we will compute the two return metrics side by side.
MOIC to IRR Table
It is strongly advised that individuals getting ready for private equity interviews commit the most common MOIC to IRR approximations to memory, particularly for the paper LBO.
| MOIC | Implied IRR |
|---|---|
|
|
|
|
|
|
|
|
|
|
|
|
Next, you can participate in a modeling exercise by completing the form below.