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LBO · 4 min read

LBO returns: IRR, MOIC and the rules of thumb

In a leveraged buyout, a private equity firm buys a company using a lot of borrowed money, then sells it a few years later. Interviewers want you to reason about the returns quickly.

Two ways to measure returns

  • MOIC (multiple of invested capital): money out ÷ money in. £400m in, £1,200m out = 3.0x.
  • IRR (internal rate of return): the annual return that produces that multiple over the holding period.

Rules of thumb

  • 2x in 3 years ≈ 26% IRR.
  • 2x in 5 years ≈ 15% IRR.
  • 3x in 5 years ≈ 25% IRR.

What drives returns

  1. Growing EBITDA, so the business is worth more at exit.
  2. Paying down debt with the company's cash flow, so more of the exit value belongs to the sponsor.
  3. Selling at a higher multiple than you paid.

Check you've got it

1/3

Work it out

A private equity firm doubles its money (2.0x) over 5 years. Roughly what is the IRR, in %? (Answer to the nearest whole number.)

Assumes: No interim dividends: one investment in, one exit out.