How does a change in exit multiple or holding period affect IRR and MOIC in an LBO model?

• A. Higher exit multiple increases MOIC but not IRR; longer holding period increases IRR.
• B. Higher exit multiple decreases IRR; shorter holding period decreases MOIC.
• C. Holding period has no impact on IRR.
• D. Higher exit multiple and shorter holding period increase IRR; MOIC rises with higher exit value and longer duration.

Answer: (D)

In an LBO, the two metrics measure different aspects of value realization. IRR is the annualized return to equity holders, so it’s highly sensitive to both how big the exit value is and when you realize it. A higher exit multiple pushes the exit value upward, which increases IRR. If you also shorten the holding period, you realize that larger exit value sooner, which further boosts IRR because returns are earned over fewer years.

MOIC is the simple ratio of exit value to invested equity. It rises directly when the exit value is higher (i.e., a higher exit multiple). The holding period doesn’t by itself change MOIC unless it enables achieving a higher exit value; otherwise MOIC is driven by how much you get at exit relative to what you put in.

So, higher exit multiple raises both the exit value and IRR, and a shorter holding period improves IRR by speeding up the realization of that higher exit value. MOIC increases with higher exit value, and if a longer duration correlates with realizing a higher exit value, MOIC would rise as well.