What is a good IRR in private equity?

It depends on strategy and risk, but buyout deals are commonly underwritten to roughly 20% to 25% gross IRR, with fund-level net IRR lower after fees and carry. The right benchmark is always the fund's cost of capital and its peer set.

What is the difference between IRR and MOIC?

IRR measures how fast money compounds; MOIC measures how many times it comes back. A high IRR can come from a quick small win, while a higher MOIC may return far more dollars over a longer hold. Read them together.

Why does a longer holding period lower IRR?

IRR is time-weighted, so the same multiple earned over more years compounds at a lower annual rate. A 3.0x over five years is about a 25% IRR; the same 3.0x over seven years falls to roughly 17%.

IRR (Internal Rate of Return) - Definition & Worked Example

Internal Rate of Return (IRR) is the annualized, time-weighted return that sets the net present value of a deal's cash flows to zero. It is the headline return metric for both individual deals and funds, and the figure most LBO modeling tests ask you to solve for. Because it is time-sensitive, IRR rewards returning capital quickly: a dollar back in year two is worth far more to the IRR than the same dollar in year six.

Why it matters

IRR is the number most PE firms and their LPs lead with. It compounds, it is time-aware, and it captures the value of pulling cash forward, which is why moves like a dividend recapitalization can lift IRR even when they do not change the total dollars returned. That same sensitivity is why IRR has to be read with a second metric beside it.

Worked example

The same multiple, two different IRRs

Roughly speaking, a 3.0x MOIC earned over five years is about a 25% IRR. Hold that same 3.0x for seven years and the IRR falls to about 17%. Same money returned, very different IRR, entirely because of time. This is why holding period is a direct lever on the headline return.

The common mistake

Reading IRR without its MOIC. A high IRR can come from a quick, small win or from financial engineering like an early recap, while a lower IRR on a larger MOIC may return far more dollars. The two metrics have to be read together: IRR for speed, MOIC for magnitude. At the fund level, the same logic extends to DPI, the cash that has actually been returned to LPs.