MOIC measures how many times the initial investment has been returned. IRR represents the annualized rate of return accounting for the timing of cash flows.
Precise IRR Calculation: Requires detailed cash flow schedule including initial investment, annual cash flows, and exit proceeds. Use Excel IRR or XIRR functions for precise calculations.
Target LBO returns typically range from 20-30% IRR and 2.0-3.0x MOIC over 3-7 years. Returns are driven by EBITDA growth, multiple expansion, debt paydown, and operational improvements.
Steps
Enter initial investment (equity invested at acquisition).
Enter exit value (total proceeds received at exit).
Enter holding period in years.
Review MOIC and IRR calculations.
Additional calculations
Enter your LBO investment parameters to see additional insights.
MOIC tells you how many dollars you got back per dollar in. IRR tells you the speed of those dollars. High MOIC with long duration can still be mediocre IRR; shorter duration boosts IRR.
Core Math and Approximations
MOIC = Exit Value / Initial Investment
IRR ≈ (MOIC)^(1/Holding Period) - 1
The approximation works when cash flows are mostly at exit. For precise IRR, include interim cash flows (dividends, fees, partial exits) with IRR/XIRR.
Four Drivers: Growth, Multiple, Deleveraging, Ops
EBITDA Growth: Volume, pricing, margin expansion.
Multiple Expansion: Exiting at higher EV/EBITDA than entry.
Deleveraging: Paying down debt to expand equity value.
Operational Upside: SG&A efficiency, working capital, capex discipline.
Holding Period and Timing Effects
Shorter holds magnify IRR for the same MOIC. Early dividends or partial exits accelerate IRR. Delayed exits or back-loaded value creation compress IRR.
Benchmarks and Quartiles
Bottom quartile: <15% IRR, <1.5x MOIC
Median: 15–20% IRR, 1.5–2.0x MOIC
Top quartile: 25%+ IRR, 2.5x+ MOIC
Context matters: sector growth, leverage allowed, and cycle timing shift what is “good.”
Stress Testing and Sensitivities
Run downside cases on: lower exit multiple, slower EBITDA growth, delayed exit, higher interest. Small hits to multiple or timing can wipe out accretion; stress-test before committing capital.
Execution Playbook
Baseline: compute MOIC and IRR for base exit and timing.
Decompose returns: growth vs. multiple vs. deleveraging vs. ops.
Run sensitivities: ±1–2x EBITDA multiple, ±10–20% EBITDA, ±12–24 months exit.
Layer in interim distributions to see IRR uplift.
Align with fund hurdle and quartile benchmarks before go/no-go.
Conclusion
Great LBOs mix sensible entry price, disciplined leverage, EBITDA growth, and at least modest multiple expansion. Translate MOIC to IRR, test timing rigorously, and stress every driver—returns are won or lost on a few key assumptions.
FAQs
What is MOIC in LBO?
MOIC (Multiple on Invested Capital) measures how many times the initial investment has been returned. MOIC = Exit Value / Initial Investment. For example, MOIC of 2.5x means $2.50 returned for every $1.00 invested.
What is IRR in LBO?
IRR (Internal Rate of Return) is the annualized rate of return that makes the NPV of all cash flows equal to zero. It accounts for the timing of cash flows and represents the compound annual growth rate of the investment.
How is IRR calculated from MOIC?
IRR ≈ (MOIC)^(1/holding period) - 1. For example, if MOIC is 2.5x over 5 years, IRR ≈ (2.5)^(1/5) - 1 = 0.20 or 20%. This is an approximation; precise IRR requires detailed cash flow analysis.
What is a good LBO return?
Target LBO returns typically range from 20-30% IRR and 2.0-3.0x MOIC over 3-7 years. Returns vary by industry, deal size, and market conditions. Top quartile funds often achieve 25%+ IRR and 2.5x+ MOIC.
How does holding period affect returns?
Longer holding periods generally require higher MOIC to achieve the same IRR. For example, 2.0x MOIC over 3 years ≈ 26% IRR, but over 7 years ≈ 10% IRR. Shorter holding periods are preferred for higher IRRs.
What factors drive LBO returns?
Key drivers include: EBITDA growth, multiple expansion (exit multiple vs. entry multiple), debt paydown (reducing leverage over time), and operational improvements. The most successful LBOs combine multiple drivers.
How do I calculate precise IRR?
Precise IRR requires detailed cash flow schedule including: initial investment, annual cash flows (distributions, fees), and exit proceeds. Use Excel IRR or XIRR functions, or financial calculators. The approximation formula works well for simple cases.
What is the difference between gross and net IRR?
Gross IRR includes only investment returns, while net IRR deducts management fees and carried interest. Net IRR is typically 3-5 percentage points lower than gross IRR and represents returns to limited partners.
How do I validate LBO returns?
Validate by: comparing to similar transactions and fund benchmarks, assessing reasonableness of exit assumptions, reviewing EBITDA growth and multiple expansion assumptions, checking debt paydown projections, and performing sensitivity analysis.
What are typical LBO return ranges?
Typical ranges: Bottom quartile: <15% IRR, <1.5x MOIC. Median: 15-20% IRR, 1.5-2.0x MOIC. Top quartile: 25%+ IRR, 2.5x+ MOIC. Returns vary significantly by fund, strategy, and market conditions.
Summary
This tool calculates MOIC and IRR for leveraged buyout investments based on initial investment, exit value, and holding period.
Outputs include MOIC, 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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Calculate MOIC and IRR for leveraged buyout investments based on exit value and holding period.
How to use LBO (Leveraged Buyout) Return Calculator
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Frequently asked questions
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Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.