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Academy May 12, 2022

What Is The Difference Between IRR and MOIC?

Two metrics, internal rate of return (IRR) and multiple on invested capital (MOIC), are key for understanding investment opportunities.

By Accrete Team

Newcomers to the alternative investments space are confronted by a lot of numbers. Two in particular — internal rate of return (IRR) and multiple on invested capital (MOIC) — are important to understand, as they can provide a quick, high-level snapshot of an investment opportunity. “Investors who understand MOIC and IRR have a leg up when considering opportunities,” says Accrete CEO Ali Shekofti. “Each can be a useful metric in its own right, depending on the goals of the investor.”

What Is MOIC?

MOIC indicates the total expected return on an investment, independent of time. A $1 million investment in a company with a MOIC of >2x is expected, although not guaranteed, to return at least $2 million. The MOIC would be the same regardless of whether that return was realized in one year or ten years.

What Is IRR?

IRR is an estimate of returns for an investment within a given period of time. While MOIC is a prediction of the return that could eventually be generated by a given investment, IRR helps investors understand the type of return they might expect within a given investment period.

How Do You Use IRR And MOIC?

Imagine two private companies, Owls Solutions and Seagulls Industrial. Both Owls Solutions and Seagulls Industrial are seeking investments, and both have a MOIC of 3x. That means that investors putting their money into either company could expect to eventually get a return of three times the amount they put in.

However, upon closer analysis, we might find that Owls Solutions has an IRR of 28% for an investment period of five years, while Seagulls Industrial has an IRR of only 22% for a similar five year investment period. MOIC is helpful for understanding the expected returns for both investments, but IRR gives an additional key piece of information: how long it could take to get that return.

When Do You Consider MOIC vs. IRR?

Investors who have limited capital to invest or are concerned about liquidity may want to pay more attention to IRR, since it will help them understand what kind of returns they may see over a finite period of time. Institutional investors or individuals with extra capital that simply needs to be invested long-term may pay more attention to MOIC. For the typical individual, IRR is the most important metric to consider. Another important thing to keep in mind is that Gross MOIC and Gross IRR, which is how we use these metrics at Accrete, do not take into account fees and other costs.

MOIC and IRR are not perfect predictions or guarantees. They are a snapshot of the analysis that investment professionals have conducted. MOIC and IRR indicate how we think these investments will perform, but there’s always risk. Indeed, without risk, there would be no returns. “Obviously, we are conservative in the numbers we put in when we calculate MOIC and IRR,” says Redi Gjomema, investment principle at Accrete. “We don’t want to overestimate, because you are investing into the future, and these estimates can never be certain 100% of the time. This is calculated risk.”

Want to look at some real MOIC and IRR projections? Check out our investment opportunities.

Last updated May 16, 2022
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