Hi,
In practice LBO models I have noticed that sometimes, IRR is calculated based on MOIC (i.e. taking the MOIC^(1/hold period)-1) and sometimes using XIRR-formula (I of course know that XIRR is the only option when cash flows are irregular in terms of time period). Let's assume that the sponsor equity investment is made at 2019-12-31 and that the hold period is 5 years. The only cash flow is given at the end of year 5.
Why do I get slightly different answers in terms of IRR when I use XIRR compared to calculating IRR with MOIC? XIRR is used with irregular time periods between payments but in theory you should be able to use XIRR in this example as well. The Macabus long-form lbo for example uses XIRR with only 1 cash inflow.
Let's assume that the sponsor equity outflow is 200 and that at the end of year 5, sponsor equity is 500. This would give MOIC of 2.5x which would equal an IRR of 2.5^(1/5)-1=20.1124%. If using the XIRR formula however, we would get 20.0884%. Why?
XIRR takes into account leap years (366 days vs. 365), whereas the 2.5^(1/5)-1 doesn't.
Doing the IRR formula instead would get you the same answer as 2.5^(1/5)-1.
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