Internal Rate of Return (IRR)
Also called IRR
IRR simply means the annual rate of return for an investment, most commonly used when discussing PE returns.
Excel has an IRR formula and you can calculate it from MOIC with this formula:
MOIC ^ (1 / Hold Period) - 1
PE firms usually target an IRR between 20% - 25% to show that they’re able to comfortably “beat the market” ie. average S&P returns of around 15%.
In the room
IRR is the number private equity is actually judged on. Memorize a few reference points — roughly 2x in 3 years is about 26%, 3x in 5 years is about 25% based on the rule of 72.