Understanding IRR and MOIC in Private Equity

Very Hard Private Equity Valuation Performance Measurement

ABC Capital is a private equity firm managing a diversified portfolio of investments. In order to assess the performance of its private equity investments, the firm utilizes two widely recognized metrics: Internal Rate of Return (IRR) and Multiple on Invested Capital (MOIC). In assessing its recent fund, Fund V, ABC Capital reported an IRR of 15% and a MOIC of 2.0x, with investment cash flows of $500,000 and realization cash flows amounting to $1,000,000.

Given this information, which of the following statements regarding the performance measurement of Fund V is most accurate?

The IRR reflects the annualized effective compounded return on the investment, while the MOIC shows the total value returned relative to the capital invested.

The MOIC is a better measure of performance than IRR because it accounts for the time value of money.

The IRR for Fund V indicates that the project outperformed a benchmark return of 10% but does not account for the investment time horizon.

Hint

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