What is MOIC?

Multiple on Invested Capital (MOIC) is a metric used to evaluate an investment's performance by comparing the total value realized to the initial amount of capital invested.

To break it down simply, MOIC is a straightforward metric that quantifies how many multiples of the initial investment were generated. It’s a valuable tool to evaluate investment returns, particularly in private market scenarios.

Note, though, that MOIC provides a snapshot of an investment's profitability but does not account for the time value of money or investment duration.

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MOIC calculation

MOIC represents the ratio (or multiple) of the total cash inflows (which is the realized value) received from an investment relative to the total cash outflows (which is the invested capital) for that investment. 

MOIC measures how many times the initial investment amount was multiplied by the returns generated.

MOIC use cases

Let’s dive into a few ways the MOIC metric can be useful.

Comparing investments

It’s important to have a metric that can aid in comparing different investments. MOIC is useful when comparing the relative performance of different investments within a portfolio or across funds. 

In other words, MOIC provides an apples-to-apples comparison to evaluate investments consistently.

By calculating the MOIC for each investment, investors can easily identify which ones have generated the highest multiples on their invested capital. This allows them to prioritize the top-performing investments for further funding or potential exits. 

For example, if Investment A has an MOIC of 2.5x while Investment B has an MOIC of 5.0x, it's clear that Investment B has been more capital-efficient and profitable relative to the amount invested. 

Evaluating performance

MOIC also evaluates an investment's overall performance and profitability relative to the capital deployed. A higher MOIC indicates a more successful investment that has generated substantial value.

For instance, an MOIC of 5x means the investment has returned 5 times the initial capital invested, signaling a highly profitable outcome. This is a high MOIC.

Investors can use MOIC to assess fund performance, decide on additional funding, and determine appropriate exit strategies.

Risk assessment

While MOIC does not directly measure risk, it can provide insights when evaluated alongside other factors. A high MOIC could indicate a higher-risk investment that paid off or a lower-risk investment that still generated strong returns relative to the capital invested.

By comparing the MOIC of investments with similar risk profiles, investors can identify potential outliers or assess whether the returns justified the level of risk taken on. 

This risk-return analysis using MOIC can inform future investment decisions and portfolio construction strategies.

It's important to note that MOIC should be used with other metrics like IRR (Internal Rate of Return) and investment duration to better understand risk-adjusted returns and investment performance over time.

Remember that MOIC provides a valuable but singular perspective on an investment's capital efficiency and profitability.

Who uses MOIC?

MOIC is widely used by investors in private markets, such as private equity (PE) and venture capital firms, as well as real estate investors.

Private equity firms rely heavily on MOIC to assess the returns generated by the companies or assets they invest in relative to the capital deployed. MOIC allows them to compare performance across their portfolio investments.

Comparing the projected MOIC to the actual or realized MOIC helps PE firms decide whether to exit, hold or invest further funds into a company to maximize returns. 

Additionally, PE firms often set a minimum target MOIC threshold when evaluating potential investment opportunities. Deals that project a higher MOIC are more attractive as they indicate greater potential to multiply the invested capital. 

Venture capitalists use MOIC to measure the multiples achieved on their investments in startups and early-stage companies. A high MOIC indicates a successful exit and substantial value creation.

Why do investors use MOIC? Well, PE firms highlight past investments with high MOIC multiples when marketing new funds to prospective limited partners as a demonstration of their ability to generate attractive returns. 

In essence, MOIC quantifies how many multiples of the initial investment were realized upon exit. 

How successful CEOs and investors use MOIC

In a nutshell, successful CEOs closely track and aim to maximize MOIC because it is a key metric to evaluate investment performance and profitability. 

For portfolio companies, CEOs develop strategic plans and initiatives aimed at driving operational improvements, revenue growth, and margin expansion to increase the company's exit valuation and ultimately the MOIC.

A portion of portfolio company CEOs’ compensation and bonuses may be tied to achieving certain MOIC targets to align incentives with PE investors.

Realized vs. unrealized MOIC

Realized MOIC is based on actual cash proceeds received, while unrealized MOIC is based on estimated and marked values of ongoing investments. 

Both metrics are valuable for investors, with realized MOIC representing the tangible outcome and unrealized MOIC indicating a portfolio's remaining value and upside potential.

Let’s break it down: 

Realized MOIC

This is calculated based on actual cash distributions received from fully exited or realized investments. It represents the definitive, final return generated from an investment after it has been sold or liquidated. 

The realized MOIC provides a concrete measure of the value created from the initial capital invested.

Unrealized MOIC

This is calculated based on the current market value or estimated value of investments that are still ongoing and have yet to be exited. It represents the potential return that could be achieved if the unrealized investments were sold at their current valuation. 

In other words, the unrealized MOIC provides an indicative snapshot of an investment's performance at a given time. Still, the value is subject to change until the investment is realized. 

To summarize, realized MOIC provides a definitive measure of returns, whereas unrealized MOIC is speculative and can fluctuate until the investment is exited.

Gross MOIC vs. net MOIC

While gross MOIC calculates the total value realized from the investment itself, net MOIC factors in various costs, such as management fees and carried interest, reduce the investor's take-home profits.

So, net MOIC gives a more realistic picture of how much an investor truly made on their invested capital, accounting for the costs associated with that investment. It represents the investor's net proceeds or gains from the investment after paying fees and profit shares.

Common comparisons with other metrics

Multiple-on-money (MoM)

‍MoM is simply another term used interchangeably with MOIC. Both represent the multiple of the total value realized to the total capital invested.

TVPI (Total Value to Paid-In)

‍We’ll review this in more detail in the section below, “MOIC vs. TVPI.”

To keep it simple, TVPI and MOIC are very similar metrics that essentially measure the same thing—how much an investment returns compared to the capital put in. The only difference is that TVPI considers the total paid-in capital contributions over time, while MOIC looks at the initial lump sum invested. 

Cash-on-cash

‍Cash-on-cash return measures the annual pre-tax cash flow relative to the total cash invested. It is calculated for a specific time period, usually one year. MOIC, on the other hand, measures the overall multiple of the total value realized compared to the total capital invested over the entire investment period.

Entity multiple

‍Entity multiples are not directly comparable to MOIC. Why? Entity multiples value companies based on metrics, including revenues or profits. MOIC is focused specifically on the returns of an investment relative to the capital deployed. In other words, entity multiple and MOIC are not apples-to-apples comparisons.

ROI (Return on Investment)

‍ROI expresses returns as a percentage rather than a multiple. MOIC shows how many times the investment amount was multiplied. For example, an MOIC of 3x would equate to a 200% ROI.

IRR (Internal Rate of Return)

‍We’ll review this in more detail in the MOIC vs. IRR section below. 

Broadly, IRR measures the annualized rate of return over an investment's life. MOIC does not consider the time value of money or cash flow timing. IRR and MOIC can provide different perspectives. For instance, a high MOIC with a low IRR may indicate strong returns over a long holding period. 

How to calculate MOIC

To calculate MOIC, add all cash inflows from the investment (profits, distributions, sale proceeds, etc.). Then, determine the initial lump sum amount invested. This includes the purchase price plus any additional capital expenditures. Divide total cash inflow over total initial capital invested.

MOIC formula

This is the formula used to calculate MOIC: 

MOIC= Total Cash Inflow / Initial Capital Invested 

For example, if $1 million was initially invested and the total value realized was $3 million, the MOIC would be 3.0x, meaning the investment tripled the initial capital.

What is a good MOIC?

It depends on the context. While no universal threshold exists, an MOIC above 3x is widely regarded as a very good return in private equity investments. Anything above 5x is considered exceptional.

An MOIC above 2x is generally considered attractive for fund investments, though this can vary based on the fund's investment strategy, duration, and risk profile. For private market investments, an MOIC of 1.8x, meaning getting back 1.8 times the initial investment, is a good outcome.

What is a bad MOIC?

MOICs below 1.0x are widely regarded as a bad return in private equity and alternative investments, as it means the investor did not even recover their initial invested capital and suffered a loss on that investment. The lower the MOIC dips below 1.0x, the worse the investment performance.

An MOIC below 1.0x indicates that the investment has lost value, and the investor receives back less capital than originally invested.

Factors influencing MOIC

Market conditions, industry/sector, and investment timing can influence the MOIC. These three factors are interrelated. 

Skilled investors and fund managers aim to navigate these adeptly, timing investments well, selecting the right sectors, and taking measured risks to optimize their portfolios for higher MOICs over the long run. 

Let’s review each of these factors.

Market Conditions

Strong economic growth and bull markets drive higher exit valuations and returns, resulting in higher MOICs. 

Conversely, poor market conditions like recessions can suppress exit values and depress MOIC. Factors like interest rates, inflation, and market volatility impact investment performance and MOIC.

Industry/Sector

Some sectors, including technology and healthcare, tend to generate higher MOICs due to their growth potential and ability to scale rapidly. Capital-intensive industries with high operating costs (manufacturing) may see lower MOICs. 

Another factor to consider is regulatory changes or disruptions in the industry because these can significantly impact an investment's profitability and exit value, affecting MOIC.

Timing of Investments

Investing at the right time in a company or an asset's life cycle is crucial for achieving high MOICs. 

Let’s dig a little deeper. Early-stage investments carry more risk but can generate outsized returns and high MOICs if successful. Investing too late may limit the potential upside and result in lower MOICs, even for good investments. 

The holding period also impacts MOIC. Shorter holds may have lower MOICs compared to longer-term investments that allow more value creation.

MOIC calculation example

To calculate MOIC, let’s review an example of a venture capital firm that invested $1,000,000 in a fintech startup during the seed funding round (this is the initial capital invested). 

After 5 years, the startup was acquired by a larger tech company for $25,000,000.

The VC firm's share of the acquisition proceeds was $5,000,000 after accounting for dilution from later funding rounds.

So, to calculate the MOIC:

MOIC = Total Value Realized / Total Capital Invested

Total Value Realized = $5,000,000 (the VC's share of acquisition proceeds).

Total Capital Invested = $1,000,000 (the initial investment in the seed round).

MOIC = $5,000,000 / $1,000,000 = 5.0x

According to our example, the MOIC for this startup investment is 5.0x, meaning the VC firm received 5 times its initial $1,000,000 investment after the company's acquisition.

As mentioned, an MOIC of 5.0x is generally considered an excellent return, especially for an early-stage venture capital investment. This indicates that the startup significantly multiplied the initial invested capital through growth and successful exit.

What is this useful for?

The CFO or VP of Finance at this startup could use this MOIC calculation to demonstrate to investors and stakeholders the highly profitable outcome and return generated on their initial investment in the company.

What is IRR?

IRR measures the annualized rate of return over the life of an investment, taking into account time value of money. Let’s dive into the similarities and differences between MOIC and IRR. 

How are MOIC and IRR similar and different?

These metrics are widely used to assess investment performance in private equity, venture capital, and other alternative investment scenarios. Higher values of MOIC and IRR are generally viewed as more attractive investment outcomes. MOIC and IRR aim to measure the returns generated from an investment relative to the capital invested. 

The key difference is that MOIC compares the total value realized from an investment to the initial capital invested. It does not account for the time value of money or the timing of cash flows. Conversely, IRR calculates the annualized rate of return and considers the timing and value of cash inflows and outflows over the investment period.

Wondering which metric is more important, MOIC or IRR? 

Well, MOIC provides an absolute measure of value creation, while IRR gives a time-adjusted percentage rate of return. A high MOIC with a low IRR could indicate strong return on capital over a long holding period. Conversely, a high IRR with a low MOIC may suggest quick returns but limited capital multiplication.

Put another way, MOIC helps to evaluate the absolute return on an investment, while IRR helps evaluate the relative return.

Savvy investors often consider both MOIC and IRR, along with other factors like investment duration and risk profile, to make informed decisions about alternative investments.

MOIC vs. IRR (Internal Rate of Return)

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MOIC vs. TVPI (Total Value to Paid-In)

What is TVPI?

TVPI stands for Total Value to Paid-In. TVPI is a ratio that measures whether the fund's total current value is higher or lower than the capital the investors paid in to date.

How are MOIC and TVPI similar and different?

For a fund that has invested all its capital upfront as a single amount, TVPI and MOIC will give the exact same value. This is because the total paid-in equals the initial investment.

In simple terms:

For a fully deployed fund, TVPI = MOIC.

For an actively investing fund still calling capital, TVPI will be greater than MOIC.

Ultimately, both metrics are calculating the same multiple of investment returns over the capital invested or contributed. TVPI just accounts for the timing of capital calls.

So MOIC provides a simple multiple comparing an investment's total value to the capital invested. It complements metrics like IRR that account for time value of money and cash flow timing.

While both TVPI and MOIC quantify fund performance as multiples of invested capital, TVPI takes an investor's view using paid-in capital, while MOIC takes the fund's view using invested capital. TVPI is more relevant for an investor evaluating their personal returns, whereas MOIC is more applicable for a fund evaluating the performance of its underlying portfolio investments.

Disadvantages of MOIC

While simple to calculate and understand, MOIC has limitations in providing a comprehensive view of investment performance. It should be used in conjunction with other metrics like IRR that account for time value of money and cash flow timing to make more informed decisions.

Here are some disadvantages of using MOIC alone.

Doesn't account for time value of money

MOIC does not factor in the timing of cash flows or the duration of the investment holding period. It treats a $1 million return after 1 year the same as after 10 years, ignoring the time value of money. This can distort the true profitability assessment.

Limited view of/ignores risk

MOIC provides no insight into the risk taken to achieve those returns. A high MOIC could result from a high-risk investment that paid off, or a lower-risk investment with moderate but consistent returns. Risk is an important consideration omitted by MOIC.

Sensitive to exit strategy

MOIC can be heavily influenced by the chosen exit strategy and timing. An early exit may generate a lower MOIC compared to holding the investment longer to maximize value creation over time.

Focuses on return, not performance

While MOIC quantifies returns, it does not measure the underlying performance drivers like revenue growth, margin expansion, or operational improvements that create that value.

Limited to cash flow focus

By focusing solely on cash invested versus cash proceeds, MOIC may not fully capture the true economics of an investment that had other non-cash components or considerations.

Doesn't consider reinvestment

MOIC treats all cash flows as terminal. It does not account for any reinvestment of proceeds into other opportunities, which could amplify or diminish overall returns.

Not applicable for some investment types

If you're in a private company and want to understand the return on your investment, MOIC is a useful metric. However, for other types of investments, it isn't the right tool to measure returns. For example, if you're building a T-Bill ladder, you would calculate the weighted average return of the ladder.

How to use MOIC to make decisions

Let’s dive into ways to use MOIC to make decisions. 

Choosing investments

‍When evaluating potential investments, investors can set a minimum target MOIC they want to achieve. Investments that project a higher MOIC are more attractive. MOIC allows investors to compare and prioritize opportunities based on their expected return multiples.

Risk assessment‍

Like we stated earlier, while MOIC does not directly measure risk, it can provide insights when evaluated alongside other factors like investment stage, sector, leverage, etc. 

Now, a very high projected MOIC may signal a higher-risk investment, while a lower MOIC could indicate a more conservative opportunity. Investors can use MOIC in conjunction with their risk appetite to make informed decisions.

Return evaluation

‍MOIC offers a clear snapshot of an investment's overall profitability by quantifying how many multiples of the initial capital were returned. Investors can track the actual MOIC achieved on realized investments to evaluate their returns and the performance of fund managers or portfolio companies.

Prove you're a profitable investment

‍Startups or companies seeking funding can use projected MOIC calculations to demonstrate their potential for generating attractive returns for investors. A higher forecasted MOIC can increase a company's appeal and help secure investment from funds or individuals targeting specific return multiples.

Resource allocation

‍For investors with limited capital, MOIC can guide resource allocation decisions across different investment opportunities. They may choose to allocate more capital to investments with higher projected MOICs to maximize their overall portfolio returns.

Investor exit strategy

‍When planning an exit from an investment, MOIC can inform the timing and approach. Investors may choose to exit once a certain target MOIC has been achieved or hold longer if the MOIC continues increasing, balancing return objectives with opportunity costs.

Constructing portfolios

‍In venture capital, where investments have varying risk profiles and return potentials, MOIC can help construct a balanced portfolio. Investors can mix investments with different projected MOICs to achieve their desired overall risk-return profile for the portfolio.

Executive Summary

What is MOIC?

MOIC stands for Multiple on Invested Capital. It is a metric used to evaluate the performance of an investment by comparing the total value realized from the investment to the initial capital invested. MOIC represents how many times the initial investment amount was multiplied by the returns generated.

How do you calculate MOIC?

To calculate MOIC, divide the total value realized from an investment by the total initial capital invested. The total value realized includes all cash inflows like profits, distributions, and sale proceeds. The total initial capital invested is the initial lump sum amount used to acquire the investment asset.

Why is MOIC relevant to startup finance?

MOIC is highly relevant in startup finance as it quantifies the returns generated for investors like venture capitalists relative to their invested capital. 

For startups that achieve successful exits through acquisitions or IPOs, MOIC provides a clear measure of how much the initial investment multiplied in value. It allows investors to evaluate the capital efficiency and profitability of their startup investments.

Does MOIC include interest?

No, MOIC does not include interest payments or the time value of money. It is a calculation that compares the total value realized from an investment to the total capital invested, without considering the timing of cash flows or any interest earned. 

MOIC provides a snapshot of the multiple achieved on the invested capital, complementing metrics like IRR that account for interest and cash flow timing.

What does 1x MOIC mean?

A 1x MOIC represents a break-even scenario where the investor has not made any profit or loss on their investment. In other words, a 1x MOIC means the total value realized from the investment is exactly the same as the total capital invested. 

How is MOIC used in private equity?

In private equity, MOIC is used to evaluate the overall profitability and returns generated by an investment relative to the capital deployed. It allows private equity firms to compare the performance of different portfolio companies and investments. 

MOIC provides a straightforward metric for assessing capital efficiency and value creation, complementing other measures like IRR.

Wrap up: Manage your cash and drive growth with Rho

Investors rely heavily on MOIC to assess the returns generated by the companies or assets they invest in relative to the capital deployed.

Startups or companies seeking funding can use projected MOIC calculations to demonstrate their potential for generating attractive returns for investors. A higher forecasted MOIC can increase a company's appeal and help secure investment from funds or individuals targeting specific return multiples.

Improving your business's profitability can help you support future growth that will help you achieve greater returns for your stakeholders.

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