Multiple of Invested Capital (MOIC) and Internal Rate of Return (IRR) are two metrics that are used in private equity to calculate an investor's return on investment. Which statement is false regarding these two measures?

A. Unlike MOIC, IRR allows for investors to understand the impact of varying hold periods on investment returns.
B. The IRR calculation assumes distributions are reinvested at the same IRR.
C. MOIC tells you how the value of an investment has grown on an annualized basis.

Correct Answer: C

A is true. IRR measures your financial return in respect to time. That is, time is factored into IRR calculation. When investors invest $1,000,000 with a 10 year lock up, they are also investing the opportunity cost of everything they could have been doing with that money during those 10 years.

B is true. A high IRR over a shorter hold period might be inflated from a recent acquisition and is unsustainable in the longer term.

C is false. MOIC tells you how the value of an investment has grown on an absolute basis, while an IRR tells you how that investment has generated returns on an annualized (or per period) basis.