What are the two primary return metrics used in private equity?

• A. MOIC (cash-on-cash) and IRR
• B. NPV and profitability index
• C. EBITDA and free cash flow
• D. Revenue and gross margin

Answer: (A)

The main idea being tested is understanding which metrics PE investors use to gauge how much value a deal returns and how quickly that value is produced. The two primary return metrics are MOIC, or multiple on invested capital, and IRR, the internal rate of return.

MOIC measures how much money the investment turns into in aggregate. It’s the total value received (or to be received) divided by the amount of capital invested. It’s intuitive: if you put in $1 and get back $2, you’ve earned a 2x return. It’s a straightforward way to see the overall magnitude of wealth created, but it doesn’t tell you when those cash flows happen.

IRR adds the crucial timing dimension. It’s the discount rate that sets the net present value of all cash flows equal to zero. In private equity, where capital is deployed for several years and distributions occur at different times, IRR reveals not just how much you earned but how efficiently and quickly you earned it relative to your investment costs and the time value of money.

Together, these metrics capture both the total upside (MOIC) and the pace of returns (IRR), which is why they are central in PE performance reporting. Operating metrics like EBITDA or free cash flow describe business health, but they’re not return metrics. NPV and profitability index are useful in other contexts, but they’re not the two benchmarks PE practices emphasize for reporting investor returns. Revenue and gross margin are operating indicators, not measures of investment performance.