What is MOIC in Private Equity?

What is Multiple on Invested Capital (MOIC)?

The Multiple on Invested Capital (MOIC) measures the value of an investment, both realized and unrealized, divided by the amount invested. It’s used regularly in Private Equity investments to track the return on investments.

Why is MOIC Important in Private Equity?

MOIC is important in private equity because it provides a straightforward measure of the total value generated by an investment relative to the amount of capital invested. It helps investors understand the profitability of their investments without considering the time value of money.

MOIC Formula and Calculation

The formula for MOIC is:

For example, if an investment of $1,000 results in $4,000 being realized at the end of the investment’s life, the MOIC would be $4,000/$1,000 = 4x. This may also be known as cash inflows divided by cash outflows.

How to Calculate MOIC

To calculate MOIC, divide the total value of the investment (both realized and unrealized) by the initial amount invested. This calculation does not factor in the time value of money.

Access the free Financial Edge MOIC template and go through the steps to calculate MOIC for a VC fund’s investments.

Limitations of MOIC

The main limitation of MOIC is that it does not consider the time value of money. This means that it does not account for how long it takes to realize an investment, which can affect the effective return per year.

MOIC vs. IRR

MOIC measures the total value of an investment relative to the amount invested, without considering the time value of money. In contrast, the Internal Rate of Return (IRR) does factor in the time value of money, providing a clearer picture of the investment’s performance over time.

MOIC vs. TVPI

MOIC and Total Value to Paid-In Capital (TVPI) are similar metrics, but they differ in their denominators. MOIC divides the total value of the investment by the initial investment, while TVPI divides the total value by the paid-in amount by the Limited Partners (LPs). When a VC fund is fully funded and all capital calls have been met, TVPI will equal MOIC. However, if not all capital paid in has been invested, TVPI will be lower than MOIC.

Advantages and Limitations of MOIC

Advantages:

• Simple and easy to understand
• Provides a clear measure of the total value generated by an investment relative to the amount invested

Limitations:

• Does not consider the time value of money
• May not accurately reflect the effective return per year if the investment takes a long time to realize

What is a Good MOIC?

A good MOIC is typically greater than 1, indicating a profitable investment. A number less than 1 would imply a loss from the initial investment.

Here is an example calculation:

Example:

• Initial Investment: $1,000
• Total Value of Investment: $800

MOIC Calculation:

In this example, the MOIC is 0.80, which is less than 1. This indicates a loss on the investment, as the total value of the investment ($800) is less than the initial amount invested ($1,000). Most private equity firms will have a target exit multiple so will keep a keen eye on MOIC to ensure this is on track.

Conclusion

The Multiple on Invested Capital (MOIC) is a valuable metric for assessing the total value generated by an investment relative to the amount of capital invested. While it provides a straightforward measure of profitability, it does not account for the time value of money, which can impact the effective return per year. Understanding MOIC and its limitations is crucial for investors in private equity to make informed decisions.