Multiple on invested capital (MOIC) is an important indicator to measure the performance of private equity and venture capital investments. It shows how much the total current value of an investment exceeds the amount of capital invested. In the context of PE/VC investments, MOIC indicates the overall profit multiple and accounts for both realized returns from exited investments and unrealized estimated value of existing portfolio. This article analyzes the definition, calculation formula, characteristics, pros and cons of MOIC, and compares it with other indicators like IRR and TVPI, providing insights for LPs to better evaluate fund performance.
Definition and calculation formula of MOIC
MOIC, short for Multiple on Invested Capital, is calculated by dividing the total current value of the investment by the total amount invested. The total current value includes both the realized proceeds from exited investments and the estimated fair market value of existing investments in the portfolio that have not yet been exited.
The formula is:
MOIC = (Total Realized Value + Total Unrealized Value) / Total Invested Capital
The higher the MOIC, the better the returns in relation to capital invested. An MOIC equal to 1 means the investment has break even. MOIC above 1 indicates profitable investment while MOIC below 1 shows investment loss.
Characteristics and pros/cons of using MOIC
Compared to IRR which factors in the time value of money, MOIC is a static multiple indicator without considering the timing of cash flows or the holding period. Despite its limitations, MOIC has some useful characteristics:
Pros:
– Easy to calculate and understand
– Captures overall return multiple simply and intuitively
– Accounts for both realized and unrealized values
Cons:
– Fails to factor in time and timing of cash flows
– Less effective performance metric for early-stage investments
– Can be manipulated more easily than IRR
Therefore, LP should not view MOIC as a standalone indicator but rather combine it with other metrics like IRR and TVPI for comprehensive evaluation.
MOIC vs. IRR and TVPI
While MOIC shows the simple multiple return without time dimension, IRR is an annualized percentage return metric that factors in the concept of time value of money and cash flow timing over the whole fund duration.
TVPI (Total Value to Paid-In Capital Multiple) indicates the fund level returns to LPs by comparing total value to paid-in capital. Since MOIC is calculated on invested capital which includes both LP contribution and fund expenses, MOIC tends to be higher than TVPI.
For early stage private equity investments with long duration, IRR would be a better indicator than MOIC to measure the true investment return. But MOIC complements IRR by providing an intuitive return multiple that is easier to understand for many LPs.
How LPs can use MOIC more effectively
– Compare MOIC of funds with similar vintage year and strategy rather than funds of different stages
– Use MOIC more carefully for emerging funds without much exit records
– Focus on realized MOIC and weight it higher for funds in later stages
– Always interpret MOIC in relation to a fund’s IRR and TVPI
– Put MOIC in the context of fund duration, investment mandate and external market conditions
With the right context, MOIC can still be a handy supplemental metric for LPs to quickly grasp the investment return multiple.
In conclusion, MOIC expresses the invested capital return multiple in an intuitive way, but has limitations in isolating the time value and timing of cash flows. LPs should combine MOIC with IRR and TVPI for comprehensive evaluation of private equity/VC fund performance rather than just looking at MOIC alone without proper context.