MoM and IRR Calculation

Step 1: Multiple of Money (MoM)

MoM = Exit Equity Proceeds / Initial Equity Investment

MoM = $300m / $100m = 3.0x

MoM tells you how many dollars come back for every dollar invested, but it says nothing about how long that capital was tied up. A 3.0x return earned in 2 years is a very different outcome from a 3.0x return earned in 10 years — which is exactly why PE investors always report MoM alongside IRR rather than in isolation.

Step 2: Internal Rate of Return (IRR)

IRR = MoM^(1/n) - 1

Where: MoM = Multiple of Money, n = number of years the investment was held.

Using the MoM of 3.0x over a 5-year holding period:

IRR = 3.0^(1/5) - 1 = 1.246 - 1 = 24.6% (0.246)

IRR is the annually compounded rate of return that equates the initial equity outflow with the exit equity inflow. Unlike MoM, it explicitly accounts for the time value of money, which is why two deals with identical MoM but different holding periods can have very different IRRs — and why IRR is the metric LPs use to compare fund performance against their cost of capital.

Step 3: Sanity-Check Against the Rule of Thumb

Plugging the 3.0x MoM and 5-year holding period into the rule of thumb (3x in 5 years ≈ 25% IRR):

Calculated IRR: 24.6% vs. rule-of-thumb estimate: ~25%

The two are within half a point of each other, confirming the calculation. This rule of thumb exists because interviewers frequently ask candidates to estimate IRR out loud without a calculator — being able to recognize that "roughly 3x over 5 years" lands close to a 25% IRR (and that most PE funds target IRRs in the 20-25% range over a typical hold) signals genuine fluency with returns math, not just formula recall.

Final Results

• Multiple of Money (MoM): 3.0x
• Internal Rate of Return (IRR): 24.6% (0.246)

These two figures are the headline return metrics that go into every PE fund's track record and every individual deal's post-mortem, and together they let an investor compare a quick cash-on-cash multiple against a time-adjusted annual return.

Would you like to explore how a dividend recapitalization or a partial exit part-way through the holding period would change this IRR calculation?