IRR/MOIC Question
How does relevering up a company during the holding period (ex: going from 3x to 5x leverage) impact IRR/MOIC?
Trending Content - Private Equity Forum
Career Resources
IRR goes down, MOIC goes up. But if the MOIC goes up enough then the IRR will effectively increase as well.
How
I was high when I typed this. My bad.
Assuming you’re doing a levered recap, irr should go up (tv of $) and moic should go down (higher interest expense)
It depends on the use of proceeds. If you’re making an acquisition with the new debt, typically that would increase both IRR and MOIC (otherwise, it’s unlikely you would be underwriting the new add-on). If you’re raising incremental debt for the purposes of paying yourself a dividend, that’s called a dividend recap. You can pay a dividend because when you take leverage up from 3-5x, if there are no other uses for the higher loan amount, you’ll likely use the proceeds to pay yourself a dividend. All else equal, dividend recaps increase IRR (because cash/return on your investment sooner), but decrease MOIC (you pay interest on the new debt and have higher debt at exit bc of fees).
^this
At the margin and ceteris paribus, you are basically shifting some money from your "regular" exit upfront and paying a bit more over the life of the investment (the post tax interest expense on the incremental debt you have raised). Hence you can see that putting cash forward will increase IRR, however the added interest expense will slightly decrease MOIC (and slightly decrease IRR but much less than getting a chunk of your money back sooner).
Stay levered bois.
Sit exercitationem laudantium et eos ut iure. Sed nesciunt unde mollitia sequi sint et et quidem. Natus ratione ea molestiae voluptas et totam ut. Ut velit itaque porro assumenda vel voluptate ipsum rerum. Autem ea ea cupiditate consequatur unde doloremque aliquam.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...