Exit multiple IRR is a shortcut: if you know your exit as a multiple of invested capital and the hold length, you can approximate IRR without full cash flows.
Approximate Math
IRR ≈ (Exit Multiple)^(1/Holding Period) - 1
Assumes a single exit cash flow. If you have interim dividends or partial exits, move to full IRR/XIRR with dated cash flows.
Timing Sensitivity
Same multiple, longer hold → lower IRR. E.g., 2.0x over 3 years ≈ 26% IRR; over 7 years ≈ 10% IRR. Timing is as important as the multiple.
Benchmarks by Strategy
VC: 3–10x+ with wide dispersion.
Growth: 2–5x common.
Buyout: 2–3x typical.
Top quartile often starts at 3x+ for growth/VC; buyout top quartile near 2.5–3x with shorter holds.
This shortcut ignores interim cash flows, fees, and timing nuance. Use it for quick screening; move to detailed IRR/XIRR when cash flows are uneven or when dividends/recaps occur.
Quick Playbook
Estimate exit multiple from base case.
Apply IRR ≈ (multiple)^(1/years) - 1 for fast read.
Run sensitivities: ±0.5–1.0x multiple, ±1–2 years hold.
If interim dividends/recaps exist, switch to full cash flow IRR.
Benchmark to strategy quartiles before go/no-go.
Conclusion
Exit multiple IRR is a fast lens on returns: great for screening, insufficient for final underwriting. Always reconcile with full cash flow modeling when timing or interim cash flows matter.
FAQs
What is exit multiple IRR?
Exit multiple IRR calculates the annualized return (IRR) based on the exit multiple and holding period. Exit multiple = Exit Value / Initial Investment. IRR ≈ (Exit Multiple)^(1/Holding Period) - 1.
How is exit multiple IRR calculated?
IRR ≈ (Exit Multiple)^(1/Holding Period) - 1. For example, if exit multiple is 3.0x over 5 years, IRR ≈ (3.0)^(1/5) - 1 = 0.2457 or 24.57%. This is an approximation assuming no intermediate cash flows.
What is a good exit multiple?
Target exit multiples vary by strategy: Venture Capital: 3-10x+, Growth Equity: 2-5x, Buyout: 2-3x. Top quartile funds often achieve 3x+ exit multiples. Higher multiples generally mean higher IRRs, but timing matters.
How does holding period affect IRR?
Longer holding periods require higher exit multiples to achieve the same IRR. For example, 2.0x exit multiple over 3 years ≈ 26% IRR, but over 7 years ≈ 10% IRR. Shorter holding periods are preferred for higher IRRs.
What is the difference between exit multiple and MOIC?
Exit multiple and MOIC (Multiple on Invested Capital) are the same metric: Exit Value / Initial Investment. Both measure how many times the initial investment has been returned. Exit multiple is often used in IRR calculations.
How accurate is exit multiple IRR?
Exit multiple IRR is an approximation that assumes no intermediate cash flows. For precise IRR with annual distributions, use detailed cash flow analysis. The approximation works well for simple cases with exit-only returns.
What factors drive exit multiples?
Exit multiples are driven by: EBITDA growth, multiple expansion (exit multiple vs. entry multiple), operational improvements, market conditions, and industry trends. Successful exits combine multiple drivers.
How do I validate exit multiple IRR?
Validate by: comparing to similar transactions and fund benchmarks, reviewing exit assumptions and market multiples, assessing reasonableness of holding period, performing sensitivity analysis, and checking against detailed cash flow IRR.
What is multiple expansion?
Multiple expansion occurs when exit multiple exceeds entry multiple. For example, buying at 8x EBITDA and exiting at 10x EBITDA creates 2x multiple expansion. This is one of four key LBO return drivers.
How does exit multiple IRR compare to cash flow IRR?
Exit multiple IRR assumes no intermediate cash flows, while cash flow IRR accounts for annual distributions. Cash flow IRR is more accurate but requires detailed projections. Exit multiple IRR is simpler and useful for quick analysis.
Summary
This tool calculates IRR based on exit multiple and holding period for private equity and venture capital investments.
Outputs include exit multiple, exit value, IRR, interpretation, recommendations, an action plan, and supporting metrics.
Formula, steps, guide content, related tools, and FAQs ensure humans or AI assistants can interpret the methodology instantly.
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Estimate IRR from exit multiple and holding period for PE/VC investments.
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