Private equity performance metrics have shown remarkable results. The industry has generated an average annual IRR of 14.5% since 1980. These impressive numbers explain why understanding these metrics matters when evaluating investment opportunities. The Cambridge Associates US Private Equity Index has outperformed both the Russell 2000 and S&P 500 indices, delivering a pooled net return of 12.77% over the last 25 years.
Strong returns alone don’t tell the whole story when evaluating fund performance. The equity multiple definition plays a vital role in investment analysis. It represents the total cash distributed divided by total equity contributions throughout a deal’s lifecycle. A 2.5x equity multiple means investors receive $2.50 back for every dollar invested. Private equity return metrics like MOIC (Multiple on Invested Capital) and TVPI (Total Value to Paid-In Capital) work with fund performance metrics such as DPI (Distributed to Paid-In Capital) to provide a detailed view of fund performance.
This piece examines equity multiples’ significance for LPs in 2025. It explores how these multiples complement other performance indicators and what thresholds investors should think over when evaluating potential investments.
Equity Multiple Definition and Formula for LPs
MOIC is the life-blood metric that helps limited partners (LPs) review private equity investments. This simple ratio shows the total cash distributions received from an investment compared to the original equity contribution. LPs use this metric to see how many dollars they’ll get back for each dollar they put in.
How MOIC is calculated in private equity
Multiple on Invested Capital (MOIC) uses a simple yet effective formula:
MOIC = Total Value / Invested Capital
The total value has two significant parts:
- Realized Value – All cash flows already received from the investment, including dividends, distributions, and proceeds from exits
- Unrealized Value – The current market value of investments not yet sold
To name just one example, see this scenario: You invest $10 million in a private equity fund and get $5 million in distributions during the holding period. Your remaining stake is worth $20 million. Your MOIC calculation would be:
MOIC = ($5 million + $20 million) / $10 million = 2.5x
The 2.5x multiple shows your original investment grew by two and a half times. You’ll get $2.50 for every dollar you invested. A successful investment should have an MOIC above 1.0x. Anything below that means negative returns.
MOIC shines because of its simplicity and directness. Unlike time-weighted metrics, MOIC shows a clear ratio between total returns and capital invested. This makes it a great way to get insights for LPs who need to review fund performance.
MOIC calculation looks at all cash flows throughout the investment lifecycle. This covers your original investment plus any extra capital you put in during the holding period. Let’s say you invest $1 million first and later add $200,000. Your new equity basis becomes $1.2 million. If the investment sells for $1.5 million, the MOIC would be 1.25x ($1.5 million/$1.2 million).
Difference between gross and net equity multiple
LPs need to know the vital difference between gross and net equity multiples:
Gross MOIC shows returns before taking out fees, expenses, and carried interest. This number reflects the total money the investment generated before costs.
Net MOIC shows what LPs actually get after subtracting management fees, expenses, and carried interest. This number reveals the real cash going back to investors.
Here’s an example: A private equity firm invests $100 million and generates $300 million. The gross MOIC is 3.0x. But after $100 million in fees and carried interest come out, LPs only get $200 million. This results in a net MOIC of 2.0x.
This difference matters a lot for LPs doing due diligence. Fund managers might highlight impressive gross figures. LPs should focus on net multiples that affect their actual returns. Looking at both numbers helps LPs review manager efficiency and fee structures.
LPs should compare the right metrics when reviewing funds. TVPI (Total Value to Paid-In capital) looks similar to MOIC but is different in the denominator. MOIC uses initial investment while TVPI uses paid-in capital. These metrics become similar once a fund is fully funded. TVPI ends up higher than MOIC when investors haven’t met all capital calls.
MOIC gives LPs a clear, non-time-weighted way to measure investment performance that works well with other metrics. Its straightforward approach makes it vital to any detailed fund assessment framework.
Comparing Equity Multiple with IRR and DPI
A clear grasp of private equity performance metrics’ differences helps you make better investment decisions. Each metric has its own purpose. These metrics give unique insights that work together to show the complete picture of how a fund performs.
Time-weighted vs non-time-weighted metrics
Private equity performance metrics differ mainly in how they track cash flow timing. Time-weighted metrics like IRR track when money moves in and out of investments. Non-time-weighted metrics like equity multiples focus on total returns whatever the timing.
Time-weighted returns (TWR) show a fund’s growth rate over time without factoring in investor cash flows. TWR works well to review managers of publicly traded securities who can’t control when investors enter or exit funds. Private equity managers have more control over their funds’ cash flows. This makes IRR a better fit for private investments since it accounts for these flows.
Money-weighted returns (MWR) track both the timing and size of money moving in and out. This reflects what investors actually experience. The difference matters when you look at performance across various investment timeframes or strategies.
Why IRR can be misleading without equity multiple
IRR remains the most common metric in private equity. Yet using it alone can lead you down the wrong path. Here’s where IRR can trick you:
Timing Distortions: IRR prefers shorter investments. To name just one example, a $1 million investment lasting a month with a $50,000 return shows a 70% IRR but only a 1.05x equity multiple. This shows why IRR alone doesn’t tell you everything.
Reinvestment Assumptions: IRR assumes you can reinvest cash at the same return rate. This might overstate performance if actual reinvestment rates are lower.
Manipulation Vulnerability: IRR changes easily based on cash flow timing. A manager might delay needed repairs to boost IRR, which leads to a lower sales price.
Yes, it is true that IRR works well when you compare investments that last about the same time because it includes the time value of money. However, it doesn’t show you the total return clearly.
DPI vs MOIC: Realized vs total value
Distribution to Paid-In capital (DPI) and Multiple on Invested Capital (MOIC) differ in how they measure returns:
DPI shows how much capital investors have received compared to what they put in. It only counts money already paid out, which makes it a backward-looking measure of actual distributions. Investors often prefer DPI in unstable markets since they can use or reinvest actual returns.
MOIC combines both paid out and potential future value, divided by invested capital. This gives you the big picture by adding what’s been returned plus what’s still in the fund.
New funds start with a DPI of 0.0. As the fund ages and exits succeed, DPI grows. The goal is to exceed 1.0, which means investors got back more than they put in.
Once a fund ends, DPI and MOIC show almost the same thing with one big difference: DPI is after fees and costs, while MOIC shows returns before these deductions.
You should look at all these metrics together to get the full story of fund performance. MOIC and IRR point to possible total returns. DPI proves what investors actually received – a vital point for LPs who want real results instead of projected values.
How Equity Multiples Help LPs Evaluate Fund Profitability
Limited partners (LPs) can use equity multiples as a great way to get insights beyond time-weighted metrics for private fund investments. MOIC gives a clear picture of absolute returns that directly affect investment decisions.
Using MOIC to assess sponsor performance
A private equity sponsor’s value creation becomes evident through MOIC, which is a vital indicator. Fund managers can be assessed by comparing the total value generated against invested capital across their portfolio. High MOIC numbers show that a fund delivers strong returns to its investors.
Due diligence becomes more effective by analyzing past investments’ MOIC. This gives a clear picture of a manager’s potential in future deals. MOIC provides a more transparent view of a sponsor’s absolute performance than IRR, which can be manipulated through cash flow timing. Private equity sponsors measure investment performance by comparing exit proceeds with total capital invested.
Equity multiple thresholds in LP agreements
Institutional investors often set minimum MOIC thresholds while evaluating fund opportunities. A MOIC of 2.0x or higher serves as a standard for satisfactory investment performance in private equity. These thresholds need proper context:
- Economic conditions: Funds started during economic booms achieve higher average MOICs than those launched during recessions
- Investment strategy: Different strategies (growth capital, buyouts) lead to varying MOIC expectations naturally
- Risk profile: Higher-risk investments can deliver higher MOICs but face greater chances of failure
Preferred return structures based on MOIC
MOIC-based waterfall structures have become a popular alternative to traditional IRR-based arrangements. MOIC-based structures let investors receive a specific multiple of their original investment before profit-sharing starts, unlike IRR hurdles that focus on annualized returns.
Investors might recover 2x their invested capital before any carried interest distribution. This approach creates strong alignment between LPs and managers. A source notes: “It would be very enticing for prudent LP investors to hear from the sponsor, ‘If we 3x your initial investment, only then will we receive any incentive'”.
MOIC-based waterfalls work well with private equity buyout deals and long-term investment strategies. These structures offer clear total return expectations without complex time-weighted calculations. LPs find them valuable because they create transparent alignment with fund managers.
Impact of Additional Capital Contributions on MOIC
Additional capital contributions change MOIC calculations by a lot in private equity investments. This creates both challenges and opportunities for LPs. The way these contributions affect performance metrics becomes vital to evaluate accurately as funds move through their lifecycle.
Changing equity basis over time
Private equity investments’ equity basis changes throughout the fund’s life. The original MOIC calculations depend on the total amount committed at the start. This includes capital that investors paid and the associated paid-in capital used to acquire or develop assets. The base figure also covers transaction fees and management expenses.
The equity basis often grows through additional capital injections as time passes. These follow-on investments change your MOIC formula’s denominator and affect the overall multiple. LPs need to track both the original investment and later capital contributions separately to measure performance accurately.
MOIC recalculation with follow-on investments
MOIC calculations need adjustments when more capital flows into portfolio companies. LPs should monitor these distinct MOIC varieties:
- Current MOIC: (Unrealized FMV + Realized Proceeds) / Total Invested Capital to Date
- Current MOIC on Initial: Current Share Price / Purchase Price at Entry Round
- Current MOIC on Deployed Reserves: Current Share Price / Weighted Average Purchase Price in Follow-On Rounds
Follow-on investments matter most in venture capital. The ability to “double down” on winners affects fund success deeply. Many managers actively seek pro-rata rights to keep their ownership stakes as portfolio companies grow.
Overall fund performance depends on how strategically follow-on reserves get allocated. Some managers use a “Graduation Rate” strategy to decide what percentage of companies receive additional funding in later financing rounds. Follow-on investments represent substantial capital – one analysis showed $62.40M in follow-on investments across 15 companies in a $138.00M fund. This makes their effect on MOIC calculations substantial.
The industry now sees continuation vehicles offering PE funds ways to lock in strong returns on faster-growing assets. These funds can hold and manage these assets in separate funds for additional returns. Managers can now stay exposed to high-performing assets beyond traditional fund lifecycles.
Using Equity Multiples in 2025 Fund Due Diligence
Private equity opportunities in 2025 rely heavily on equity multiples to indicate potential fund performance. Private equity beats public markets by 4-5 percentage points each year over long periods. This makes a well-laid-out approach to MOIC analysis crucial to proper due diligence.
Evaluating interim vs final MOIC
Interim and final MOIC calculations tell very different stories about reliability and implications. Early fund years show MOIC has little value because managers still deploy capital and unrealized values dominate. That’s why CalPERS points out that “interim IRRs by themselves are not the best indicators of current or future fund performance”. This same principle applies to interim MOIC.
Final MOIC shows the true performance after all investments have been sold. Cambridge Associates recommends looking at both metrics to get the full picture of fund performance. The unrealized MOIC covers investments still in the portfolio, while realized MOIC only looks at completed deals.
Equity multiple benchmarks by fund vintage
Fund vintage years shape expected equity multiples. Data shows funds that invest during times of lower public market multiples perform better than those that put money to work in expensive markets. To name just one example, vintages that invested with S&P 500 P/E ratios below 15 did better than those investing when P/E ratios exceeded 25.
Market cycles tell the same story – vintages that invest during recessions generate better returns. The reason is clear: EBITDA multiples for US buyouts came in 29% lower than the S&P 500 Index over 27 years. This discount on purchase price helps private equity deliver superior returns.
Role of MOIC in LP decision-making frameworks
MOIC stands as the life-blood of LP evaluation processes because it offers a clear view of investment profitability without timing complications. Most institutional investors use MOIC with other metrics to evaluate funds quarterly.
LPs in 2025’s due diligence environment analyze MOIC projections carefully before making investment decisions. The metric helps them determine if potential returns make up for private equity’s illiquidity risk. Firms with proven high MOIC track records can utilize this history as they raise new funds.
Conclusion
Conclusion
Equity multiples serve as vital tools for LPs navigating private equity investments in 2025. This piece shows that IRR remains accessible to more people, but it has major limitations when reviewed alone. MOIC provides needed clarity by showing the exact dollar returns for each dollar invested, whatever the timing distortions.
The difference between gross and net multiples proves just as important. Fund managers might highlight impressive gross figures, but actual returns depend on net multiples after fees and carried interest. It also helps to compare MOIC with DPI to distinguish between promised returns and distributed capital—a significant factor as funds move through their lifecycles.
MOIC thresholds, which usually target 2.0x or higher, now often appear in LP agreements and set clear performance expectations. These standards must adapt to economic conditions, investment strategies, and risk profiles. Many LPs also see value in MOIC-based waterfall structures that line up manager and investor interests better.
Follow-on investments affect MOIC calculations by a lot and change the equity basis over time. So you must track both original and subsequent capital contributions separately to measure performance accurately. This becomes especially important when you have fund vintages to review, as those deploying capital during economic downturns typically generate better returns.
The private equity industry has outperformed public markets by 4-5 percentage points yearly over long periods. This impressive track record shows why you need complete metrics beyond IRR figures to review investment opportunities. Of course, MOIC fills this gap by offering a straightforward measure of investment profitability without timing complexities.
To conclude, as you review private equity opportunities in 2025, note that equity multiples are just one part of a complete evaluation framework. MOIC, combined with other metrics, helps you decide if potential returns justify private equity’s inherent illiquidity risk—and guides better investment decisions in an increasingly complex market.
