What is MOIC?
MOIC stands for “multiple on invested capital” and measures investment returns by comparing the value of an investment on the exit date to the initial investment amount.
The MOIC metric is particularly prevalent in the private equity industry, where it is used to track a fund’s investment performance and compare returns across different firms.
How to Calculate MOIC (Step-by-Step)
The multiple on invested capital (MOIC) metric measures the value generated by an investment relative to the initial investment.
Calculating the MOIC on an investment is generally straightforward, as the formula is simply the net cash return (“cash inflows”) divided by the initial cash contribution (“cash outflows”).
The term “MOIC” is interchangeable with several other terms, such as the “multiple on money (MoM)” and the “cash-on-cash return”.
The multiple on invested capital (MOIC) essentially represents the returns earned per dollar of initial investment contributed.
- High MOIC → Higher MOICs on investments are perceived positively because it is implied that the investments are profitable.
- Low MOIC → Lower MOICs are viewed negatively as it means that the investment is unprofitable (and investors are at risk of not receiving their target return, or even recoup their initial capital).
The multiple on invested capital (MOIC) is the ratio between two components, which determines the gross return.
- Initial Capital Investment
- Current Market Value of the Risky Asset (e.g. LBO Target Company)
The formula for calculating the MOIC on an investment is as follows.
- Cash Inflows: In the context of an LBO, the cash inflows stem from events such as the completion of a dividend recapitalization and a liquidity event, e.g. sale to a strategic or initial public offering (IPO).
- Cash Outflows: The cash outflows consist of namely one major item: the initial equity contribution that had been required to complete the buyout. Often, the outflows component will be displayed as a negative number in Excel, so an additional negative sign must be placed in front of the formula to work, i.e. to convert to a positive figure.
Private Equity LBO MOIC Calculation Example
For example, imagine that a private equity firm (i.e. a financial sponsor) invested $20 million to fund the purchase of an LBO target.
If the post-exit return at the end of the holding period, Year 5, is $80 million, the MOIC on the investment is 4.0x.
- Initial Capital Investment = $20 million
- LBO Exit Proceeds @ Year 5 = $80 million
- MOIC = $80 million ÷ $20 million = 4.0x
In other words, each $1.00 of invested capital grew to $4.00 over the five-year period.
Fund MOIC Formula: Realized vs. Unrealized Value
When evaluating overall fund performance, i.e. multiple assets in a portfolio, the formula uses different inputs, but the core concepts remain the same.
The classification of MOIC can be expressed on either an unrealized or realized basis.
- Unrealized MOIC → The return is inclusive of investments in the portfolio not yet sold, i.e. the expected profits post-sale are not certain (and still at risk of fluctuations).
- Realized MOIC → The return calculation is composed only of “realized” investments in the portfolio, where the profits have been locked-in.