What is MOIC?
Multiple on Invested Capital (MOIC) is a way to measure how profitable an investment is. It shows the total return you get from an investment compared to the amount of money you originally put in. So, a MOIC of 3x means you got $3 back for every $1 you invested.
MOIC is a key tool in investment analysis, especially in areas like private equity, venture capital, and real estate. It helps investors and fund managers decide whether an investment is worth pursuing.
In this article, we’ll break down the MOIC formula, how to calculate it, and how it compares to other metrics like IRR (Internal Rate of Return) and TVPI (Total Value to Paid-In Capital). We’ll also look at the pros and cons of using MOIC and how it’s used in real-world situations.
Understanding the MOIC Formula and Calculation
The MOIC formula is pretty straightforward. It’s a way to quickly see how much money an investment has generated compared to how much was originally put in.
MOIC Formula for a Single Asset
For a single investment, the formula is:
MOIC = Total Cash Inflow / Total Investment Amount
The “Total Cash Inflow” is all the money that’s come back from the investment. This could include rental income, dividends, or the money received when the asset was sold.
The “Total Investment Amount” is the amount of money originally invested.
Let’s say you invest $1 million in something, and it generates $3 million in total cash inflow. The MOIC would be 3.0x (3 million / 1 million). This means that for every dollar you invested, you got three dollars back.
MOIC Formula for a Portfolio
When you’re looking at a portfolio of investments, the formula changes slightly to account for investments that haven’t been sold yet:
MOIC = (Realized Value + Unrealized Value) / Total Investment Amount
“Realized Value” is the cash already received from investments in the portfolio that have been sold.
“Unrealized Value” is the estimated value of investments that are still held in the portfolio and haven’t been sold yet.
For example, imagine a portfolio with $200 million invested, $50 million in realized value, and $500 million in unrealized value. The MOIC would be 2.75x ((50+500)/200). This suggests the portfolio is performing well, but it’s important to remember that the “Unrealized Value” is just an estimate.
Realized vs. Unrealized MOIC
There are actually two ways to calculate MOIC, and it’s important to understand the difference.
Realized MOIC
Realized MOIC is based on the cash you’ve actually received from an investment. It’s a hard number that reflects the real returns you’ve gotten so far. Think of it as a historical record of an investment’s performance.
Unrealized MOIC
Unrealized MOIC, on the other hand, is based on the estimated current value of an investment that you haven’t sold yet. It shows what you could get if you sold the investment today at its current market value. This is a forward-looking number, but it’s important to remember that it’s just an estimate.
Why Both Matter
Both Realized and Unrealized MOIC are important. Realized MOIC tells you what you have made, providing a concrete measure of past performance. Unrealized MOIC gives you an idea of what you could make in the future, but it’s subject to change based on market conditions and how accurate your valuation is.
Gross MOIC vs. Net MOIC
You’ll often see two different MOIC figures: gross and net. Here’s the difference:
Gross MOIC
Gross MOIC is the total return an investment generates before taking out any fees or expenses. Think of it as the investment’s raw performance, not accounting for the costs of managing the investment.
Net MOIC
Net MOIC, on the other hand, does factor in all the fees and expenses, such as management fees and carried interest (the fund manager’s share of the profits). Net MOIC shows you the actual return an investor receives after all those costs are deducted.
Why Both Matter
Gross MOIC gives you a sense of the investment’s overall potential. Net MOIC gives you a more realistic picture of what the investor actually pockets. Looking at both helps you understand the total value created and how that value is distributed.
What’s a good MOIC, and what’s a bad one?
A MOIC of 1.0x means you’ve gotten your initial investment back. Above 1.0x, you’re in profit; below 1.0x, you’ve lost money.
But what’s good? Most people consider a MOIC above 3x a very solid return. Anything over 5x is exceptional.
But, of course, it’s not that simple. What counts as a “good” MOIC depends on a few things:
- The industry. Some industries have higher expected returns than others.
- The risk. Riskier investments should (ideally) have higher MOICs to make the risk worthwhile.
- The investment timeline. Longer-term investments usually need higher MOICs than shorter-term ones to account for the time value of money.
So, while the benchmarks are useful, remember to consider the specifics of the investment.
MOIC vs. IRR: Why Timing Matters
You’ll often see MOIC used alongside another metric called Internal Rate of Return, or IRR. But what’s the difference?
IRR is the annualized rate of return on an investment, and it does factor in the time value of money. Basically, IRR tells you the discount rate at which the net present value of all the cash flowing from an investment equals zero.
Here’s the critical difference: MOIC is a simple multiple of the initial investment. IRR, on the other hand, is concerned with when the cash flows happen. MOIC ignores the time value of money, while IRR doesn’t.
Let’s look at an example. Imagine two different investments. Both require an initial investment of $1 million and both return $2 million. So, both have a MOIC of 2x. However, the first investment returns the $2 million in one year. The second investment returns the $2 million after five years. The first investment will have a higher IRR because the money comes back faster.
So, when should you use each measure? MOIC gives you a quick look at the overall return. IRR helps you compare investments with different cash flow patterns and investment timelines.
MOIC vs. TVPI: What’s the Difference?
You might also hear the term “Total Value to Paid In” or “TVPI.” TVPI is a ratio that tells you how much money investors have received for every dollar they put in. It counts money they’ve already gotten back (realized value) and the current value of their investments (unrealized value).
So, what’s the difference between MOIC and TVPI?
- MOIC looks at how well a specific project or investment did based on the total amount of money invested in it.
- TVPI looks at the return investors get based on the money they actually put in.
Here’s an example: Imagine an investor puts money into a project over time. TVPI will show how the timing of those investments affected their returns. MOIC, on the other hand, just looks at the total amount invested and the final return.
Think of it this way:
- Use MOIC to see how well the investment itself performed.
- Use TVPI to see how well the investors in the fund did.
What factors influence MOIC?
Several factors can affect a fund’s or investment’s MOIC.
- Market Conditions: In general, MOIC metrics rise during bull markets and decline during bear markets. Economic ups and downs will impact investment valuations and opportunities to exit positions.
- Industry/Sector: High-growth industries tend to produce higher MOICs than more established industries. Also, the risks and opportunities that are unique to certain sectors will impact investment returns.
- Investment Timing: Investing early in a company’s life can lead to huge MOICs if the company takes off. When you enter and exit a position relative to market cycles will also have a significant effect on the return you see.
Advantages and disadvantages of using MOIC
Like any financial metric, MOIC has strengths and weaknesses that are important to keep in mind when you’re making investment decisions.
Advantages of MOIC
- Simplicity. MOIC is easy to calculate and easy to understand.
- Quick assessment. MOIC gives you a fast overview of how profitable an investment has been.
- Widespread use. MOIC is a common language in the private equity and venture capital fields.
Disadvantages of MOIC
- Ignores time value of money. MOIC doesn’t take into account when the cash flows happened. A dollar today is worth more than a dollar tomorrow, and MOIC doesn’t reflect that.
- Limited risk assessment. MOIC doesn’t factor in the riskiness of the investment. A high MOIC might look good, but it could be hiding a very risky venture.
- Sensitive to exit strategy. MOIC heavily depends on how much the investment is worth when you sell it. If you have to sell at a lower price than you expected, your MOIC will take a hit.
How MOIC Influences Investment Decisions
MOIC isn’t the only thing investors look at, but it’s an important metric. Here are some of the ways investors use MOIC:
- Investment Selection: When choosing between possible deals, MOIC helps investors screen and compare different opportunities.
- Risk Assessment: MOIC gives investors an idea of the potential return for the capital they invest. This is an important part of evaluating the risk of a deal.
- Performance Evaluation: Investors use MOIC to track the performance of their existing investments and compare them to similar deals.
- Fundraising: A high MOIC is attractive to other investors and makes it easier to raise money for future deals.
- Resource Allocation: MOIC helps investors put their money into deals that are likely to produce the highest returns.
- Exit Strategy: MOIC influences decisions about when and how to sell an investment.
- Portfolio Construction: Investors use MOIC to make decisions about how to balance risk and reward in their portfolios.
In Summary
MOIC, or Multiple on Invested Capital, is a tool for judging how well an investment is performing, particularly in the world of private equity and venture capital. It’s a simple way to quickly see how profitable an investment has been.
However, it’s important to remember that MOIC has some limitations. For example, it doesn’t account for the time value of money or the level of risk involved.
That’s why it’s best to use MOIC along with other measures like Internal Rate of Return (IRR) and Total Value to Paid-In Capital (TVPI) to get a more complete picture of an investment’s success. By considering all these factors, investors can make smarter choices and increase their chances of a positive outcome.
Ultimately, understanding MOIC and its limitations empowers investors to make well-informed decisions and improve their overall investment results.