Making returns comparable across time
IRR (internal rate of return) is the annualized growth rate that would turn the invested amount into the returned amount, given how long the money was actually tied up. It's what makes 2× in 2 years, 2× in 5 years, and 2× in 10 years comparable, when MOIC alone treats them as identical.
- 2× in 2 years ≈ 41% IRR
- 2× in 5 years ≈ 15% IRR
- 2× in 10 years ≈ 7% IRR
Why speed matters
Same MOIC, wildly different quality of investment, the 2-year deal freed the fund's capital up to be redeployed into a new deal years earlier, compounding again, while the 10-year deal tied it up for most of a decade. This is why PE firms watch IRR as closely as MOIC, and why a faster exit at a slightly lower MOIC can beat a slower exit at a higher one.
- Meridian's 2.3× MOIC (Lesson 20) over a 5-year hold works out to roughly 18% IRR, a genuinely strong outcome by PE standards, where high-teens IRR is a common target.
| MOIC | Holding period | IRR |
|---|---|---|
| 2.0x | 2 years | ~41% |
| 2.0x | 5 years | ~15% |
| 2.0x | 10 years | ~7% |
| Meridian, base case | 5 years | ~2.3x, ~18% IRR |
Checkpoint
- IRR: the annualized return rate, accounting for how long capital was invested, not just how much came back.
- Same MOIC: can represent a much stronger or weaker deal depending on holding period.
If anything here still feels unclear, ask before moving to Lesson 22.