IRR vs MOIC: Two Ways to Raise a Reported Return Without Making Anyone More Money
Take the equity position from the previous post — $67.9m in, distributions over twenty years, a 15.07% IRR and a 3.66× multiple. Now do two entirely ordinary things to it.
Sell in year seven, at a price giving the buyer the same 15.07% return on the remaining cash flows. The seller's IRR is still 15.07%. Its multiple falls to 2.04×.
Fund the investment from a subscription facility and call capital from investors twenty-four months later. The reported IRR rises to 19.61%. The multiple falls to 3.27×, because investors pay the facility's cost.
In the first case the return is identical and the money is not. In the second the return is 454 basis points higher and the money is less.
Neither measure is wrong, and neither is sufficient. This post covers what each captures, the two mechanisms above in detail, why infrastructure is particularly exposed to the divergence, and what to look at instead.
ℹ️ Note: All figures are labelled assumptions carried forward from the Series E capital structure. Fund-level conventions vary; the arithmetic does not.
What Does Each Measure?
| Measure | Definition | Captures | Ignores |
|---|---|---|---|
| IRR | Discount rate at which net cash flows are zero | Timing | Scale |
| MOIC | Total distributions ÷ total contributions | Scale | Timing |
| DPI | Distributions ÷ paid-in capital | Cash actually returned | Unrealised value |
| RVPI | Residual value ÷ paid-in capital | Unrealised value | Whether it is realisable |
| TVPI | DPI + RVPI | Total value, realised and not | The difference between them |
The pairing that matters is IRR and MOIC, because each is blind to precisely what the other measures. An IRR rewards speed and says nothing about how much was made. A multiple rewards magnitude and says nothing about how long it took.
The pairing that matters for an investor actually receiving cash is DPI against TVPI, because the gap between them is value the manager has marked and not yet returned.
The Exit Case: Same IRR, Half the Money
Hold to end of life
Contributions $67,883,125
Distributions $248,626,824
IRR 15.07%
MOIC 3.66×
Exit at end of year 7, priced at a 15.07% buyer return
Sale proceeds $65,101,740
IRR 15.07%
MOIC 2.04×
The seller achieves exactly the same annualised return and receives $1.62 less per dollar invested. Everything about the asset is unchanged; only the holding period differs.
For a fund with a defined life this is not a failure — it is the point. Capital returned in year seven can be redeployed, and a manager that can reinvest at 15% turns a 2.04× over seven years into a larger multiple over twenty. That is exactly the reinvestment assumption the previous post identified as embedded in the IRR, and here it is doing real work rather than being an artefact.
The question is therefore whether the reinvestment actually happens, at what rate, and after what fees. For an investor receiving the distribution and holding it in cash while the manager finds the next asset, the multiple is the honest measure and the IRR is not.
There is a second-order effect worth naming because it shapes manager behaviour rather than just reporting. A fund measured primarily on IRR has a standing incentive to sell early, since the annualised return is preserved while the holding period shortens — and every year of additional hold on an asset already returning its target dilutes nothing but adds duration. A fund measured on multiple has the opposite incentive.
For infrastructure that tension is sharper than elsewhere, because the assets are built to run for decades and the funds holding them typically are not. An asset with twenty-five years of contracted life sitting in a ten-year fund will be sold, and the sale is driven by the fund's structure rather than by anything about the asset. Continuation vehicles and open-ended infrastructure funds both exist as responses to that mismatch, and both are attempts to stop a measurement convention from determining when good assets change hands.
The Subscription Line Case: Higher IRR, Less Money
A subscription credit facility — a capital call line — lets a fund draw on a bank facility to make an investment and call capital from its investors later. The facility is secured on the investors' unfunded commitments, which is excellent collateral, so it is cheap.
The effect on reported returns is mechanical:
| IRR | MOIC | |
|---|---|---|
| No facility | 15.07% | 3.66× |
| 12-month deferral | 16.76% | 3.46× |
| 24-month deferral | 19.61% | 3.27× |
A twenty-four month deferral adds 454 basis points of IRR and removes 0.39× of multiple. The IRR rises because investors' capital is outstanding for two years less. The multiple falls because the facility's interest cost is borne by the fund.
There is nothing improper about any of this. Subscription lines serve genuine operational purposes — they smooth capital calls, allow a manager to move quickly on an opportunity, and reduce the administrative burden of frequent drawdowns. Investors generally prefer receiving fewer, larger calls.
The difficulty is that the same instrument also raises the number by which managers are compared, measured and in many cases paid. A performance fee calculated on an IRR hurdle is materially easier to clear with a 24-month subscription line than without one, and the investors funding that outcome are worse off by the facility's cost.
The honest response, which better investors now require, is to report returns both with and without the facility. That single disclosure removes the ambiguity entirely and costs nothing.
Gross or Net? The Third Lever
The subscription facility and the exit timing are structural. Fees are arithmetic, and they move both measures rather than trading one against the other.
On the same position, with a 1.5% annual management fee on committed capital and a 15% carried interest:
| IRR | MOIC | |
|---|---|---|
| Gross | 15.07% | 3.66× |
| Net of management fee | 13.49% | 3.36× |
| Net of fee and carry | 13.02% | 3.01× |
Over twenty years the management fee totals $20.4m and the carry $24.1m — together roughly $44.4m against $67.9m of contributed capital, and 205 basis points of annualised return.
Three points follow.
The fee drag is duration-dependent, which is an infrastructure-specific problem. An annual fee charged for twenty years costs far more in total than the same fee charged for seven, and it compounds against the low-multiple profile the asset class produces. A 1.5% fee that looks modest against a private equity fund's returns is a much larger share of an infrastructure fund's.
Carry on a long-hold asset is charged on a gain accumulated slowly. Whether a preferred return is compounded and whether carry is taken deal-by-deal or whole-of-fund both matter substantially over twenty years, and the difference between them is larger than most fee negotiations.
Gross and net are not always distinguished in marketing. A manager quoting "15%" without specifying is quoting a number that could be either, and the gap here is 205 basis points — larger than the difference between a good fund and an average one.
The instruction is the same as everywhere else in this post: ask which, and ask for both.
Why Infrastructure Is Particularly Exposed
Three structural features make the divergence larger here than in most asset classes.
Long holds. A twenty-year asset produces a modest annualised return and a large multiple. A seven-year private equity deal produces the reverse. Comparing an infrastructure fund's IRR to a buyout fund's without reference to duration compares two different things.
Income-heavy returns. Infrastructure distributes cash throughout the hold rather than concentrating it in an exit. That flatters the IRR — early cash is heavily weighted — and it means the multiple accumulates slowly. A fund reporting 15% and 1.4× at year five is not underperforming; it is five years into a twenty-year asset.
Low multiples by design. A core infrastructure asset earning a contracted return will never produce a 5× multiple. If it did, something would have been badly mispriced. So infrastructure managers are structurally incentivised toward the IRR, which is the measure their asset class looks better on.
The consequence is that multiple and IRR should be read against the holding period, and a fund reporting one without the other is reporting half the answer.
The J-Curve, and What It Actually Shows
Early in a fund's life, capital has been called and fees charged while assets have not yet appreciated or distributed. Reported returns are negative, then cross into positive territory as distributions begin — the J-curve.
Two things are worth knowing about it in an infrastructure context.
It is shallower than in private equity. Infrastructure assets distribute earlier, so the trough is less deep and the crossing earlier. A deep J-curve in an infrastructure fund is a signal about the strategy, not a feature of the asset class.
A subscription line flattens it artificially. Deferring capital calls defers the fee drag and the negative early returns, which makes an early-life fund look considerably better than the same fund without the facility. That is the same mechanism as above, appearing in the most-scrutinised part of a fund's reporting.
NAV Loans and Continuation Vehicles
Two newer instruments that do at the end of a fund's life what a subscription line does at the beginning.
A NAV loan borrows against the fund's portfolio rather than against unfunded commitments, and the proceeds are distributed to investors. The effect on reported figures is immediate: DPI rises, because cash has genuinely been distributed, while the underlying assets are unchanged and now carry debt against them. An investor reading DPI as a measure of realisation — which is exactly why DPI is the most trusted number — is reading a figure that has been created by borrowing.
That makes NAV lending a specific problem for the recommendation this post has been building toward. DPI is the measure that cannot be marked or modelled; it can, however, be borrowed.
A continuation vehicle sells an asset from one fund to another managed by the same manager. The selling fund realises a gain, crystallises an IRR and a DPI, and the asset does not change hands in any economic sense. Where the price is set by a genuine third-party process with new investors setting the terms, this is a real transaction. Where it is not, it is a mark converted into a realisation.
Neither instrument is illegitimate and both solve real problems — a NAV loan can bridge a distribution across a poor exit window, and a continuation vehicle can hold a good asset past a fund's term rather than forcing a sale. The point is narrower: the measures that were reliable because they resisted engineering are now engineerable too, and the diligence question has moved from "what is the DPI" to "what produced it."
The practical additions to the list below are therefore: was any distribution funded by borrowing, and was any realisation a sale to an affiliate.
What Should an Investor Look At?
Five things, and the IRR is not first.
DPI. Cash actually distributed against cash actually paid in. It is the only measure that cannot be marked, modelled or engineered — the money either arrived or it did not.
MOIC or TVPI, with the holding period stated. A multiple without a duration is as incomplete as an IRR without a scale.
IRR with and without the subscription facility. Both numbers, disclosed.
The gap between DPI and TVPI. Unrealised value the manager has marked. A large gap late in a fund's life is a question, not a number.
Cash yield on invested capital. For an income asset this is the most directly relevant measure and the least reported — what percentage of invested capital arrives as cash each year.
What Does the Public Market Equivalent Add?
A benchmark, which is the thing every measure above lacks.
IRR, MOIC and DPI all describe a fund in isolation. None answers the question an allocator actually faces: was this better than the alternative of putting the same money, on the same dates, into a liquid index?
Public market equivalent methods answer exactly that. They take the fund's actual cash flow dates and amounts, apply them to a chosen index, and compute what the investor would have had. The output is a ratio — above one means the fund beat the index on the same timing, below one means it did not.
Three things make it valuable here specifically.
It neutralises the timing lever. A subscription facility that defers capital calls also defers the hypothetical index investment, so the comparison is unaffected. The 454 basis points the facility added to the IRR largely disappear from a PME, because the benchmark gets the same treatment.
It handles the long hold naturally. Comparing a twenty-year infrastructure fund's IRR to a seven-year buyout fund's is meaningless; comparing each to what the same cash flows would have earned in a market index over its own period is not.
It forces a choice of benchmark, which is itself informative. An infrastructure manager arguing its returns should be compared to a utilities index rather than a broad equity index is making a claim about the asset class's risk that can be examined.
The limitations are real. PME is sensitive to the index chosen, it says nothing about risk beyond what the benchmark embodies, and it can be unstable where a fund's early cash flows are small. It is a cross-check rather than a replacement.
But it is the only measure in this post that a manager cannot improve through a financing decision, which in a section about financing decisions that improve measures is a strong recommendation.
How Do You Build This in Excel?
As both measures, both facility cases, and the holding period alongside.
The two measures
MOIC = SUM(Distributions) / SUM(Contributions)
IRR = IRR(Net_Cash_Flows)
DPI = SUM(Distributions_Realised) / SUM(Contributions)
TVPI = (SUM(Distributions_Realised) + Residual_Value) / SUM(Contributions)
The subscription line toggle
Without facility: Contribution at t=0
With facility: Contribution at t=Deferral, plus Facility_Cost
PF_IRR_NoFacility 15.07%
PF_IRR_WithFacility (24 months) 19.61%
PF_SubscriptionLineEffect +4.54 pp
PF_MOIC_NoFacility 3.66×
PF_MOIC_WithFacility 3.27×
PF_SubscriptionLineCost −0.39×
The exit sensitivity
Exit year IRR MOIC
7 15.07% 2.04×
20 15.07% 3.66×
Reporting an exit year alongside every return converts an incomparable number into a comparable one. The two rows above describe identical annualised performance and materially different outcomes for the holder.
The check that settles most arguments
PF_HoldingPeriodYears
PF_CashYieldOnInvestedCapital = Annual_Distribution / Contribution
= 10,479,268 / 67,883,125 = 15.4%
ℹ️ Note: Never compare an IRR across funds without comparing holding periods, and never compare a multiple without them either. The two measures answer different questions and each is meaningless on the dimension the other covers.
To build both measures, the subscription line comparison and the exit sensitivity, prompt Dezzmond with your contribution and distribution schedule.
What Do Investors Actually Check?
- What is the DPI, as distinct from TVPI?
- Is the IRR reported with and without the subscription facility?
- What is the holding period behind the multiple?
- How much of TVPI is unrealised, and how is it marked?
- What is the cash yield on invested capital each year?
- Would the performance fee have been earned without the facility?
- Is the manager's reinvestment assumption realistic given the redeployment record?
Frequently Asked Questions
What is the difference between IRR and MOIC?
IRR is a time-weighted rate that captures when cash arrives and ignores how much. MOIC is total distributions divided by total contributions, capturing how much and ignoring when. Each is blind to what the other measures.
How much does a subscription line affect reported returns?
On the worked example, a twenty-four month deferral raises the IRR from 15.07% to 19.61% — 454 basis points — and reduces the multiple from 3.66× to 3.27×, because investors bear the facility's cost.
Can an early exit leave the IRR unchanged?
Yes. Selling in year seven at a price giving the buyer the same return produces an identical seller IRR of 15.07% and a multiple of 2.04× against 3.66× on a full hold. Same annualised return, $1.62 less per dollar invested.
Why do infrastructure funds report lower multiples?
Because they hold assets longer and distribute income throughout rather than concentrating returns in an exit. A modest multiple over twenty years can represent a perfectly strong annualised return.
How much do fees cost over a long hold?
On the worked example, a 1.5% management fee and 15% carry over twenty years total about $44.4m against $67.9m of contributed capital — taking the return from 15.07% gross to 13.02% net, and the multiple from 3.66× to 3.01×.
Can DPI be engineered?
Increasingly, yes. A NAV loan borrows against the portfolio and distributes the proceeds, raising DPI without any realisation. A continuation vehicle crystallises a gain by selling to another fund the same manager runs. Both can be legitimate; both mean the question is now what produced the DPI.
What is the most reliable measure?
DPI has the strongest claim — cash distributed against cash paid in, which cannot be marked or modelled. But NAV lending means it can now be borrowed, so the honest answer is DPI plus a question about what funded it, cross-checked against a public market equivalent.
What does a PME add?
A benchmark. It applies the fund's own cash flow dates and amounts to a market index and asks what the investor would otherwise have had. Crucially it is unaffected by a subscription facility, because the benchmark receives the same deferred timing.
Closing: Two Levers, Both Legitimate, Both Worth Disclosing
Nothing in this post describes misconduct. Selling an asset in year seven is a normal portfolio decision. Using a subscription facility is standard practice with real operational benefits, and investors often ask for it.
What both have in common is that they move the headline return without improving what an investor receives — and in the subscription line case, while slightly reducing it. A manager can therefore report a materially better number by making two ordinary decisions, neither of which requires the assets to perform any better.
The fix is not to ban either practice. It is disclosure of a kind that costs nothing and is still not universal: report the IRR with and without the facility, report the multiple alongside the IRR, report the holding period alongside the multiple, and report DPI separately from TVPI.
Any investor holding those four disclosures can reconstruct what actually happened. Without them, a 19.61% IRR and a 15.07% IRR can describe the same assets, the same cash flows and the same manager — and the difference between them is a credit facility.
The next post takes the version of this that happens before a fund is involved at all: what a developer actually earns when it sells a project, and where the development premium comes from.
Sources: Wall Street Prep — Distinctive Features of a Project Finance Model · Energy IB Guide — Renewable Energy Valuation: Contracted Cash Flows, Merchant Tail and Yield Frameworks · Ryan O'Connell, CFA — Building a Project Finance Financial Model · Edward Bodmer — Project Finance Exercises