hard · Private Equity & LBOs
Two deals each return a 2.0x gross MOIC over a 5-year hold. Deal A returns all proceeds in a single lump at exit in Year 5. Deal B returns half the proceeds (1.0x of invested capital) via a dividend recap at the end of Year 3 and the other half at exit in Year 5.
Holding MOIC identical, which statement about their gross IRRs and the GP's typical carried-interest economics is correct?
- Deal B has the higher IRR because the recap accelerates cash, yet under a whole-fund waterfall with a preferred return the recap can also pull carry forward and increase the GP's clawback exposure
- Deal A has the higher IRR because a single terminal cash flow compounds at the multiple's annualized rate without interim leakage of return
- Both deals have identical IRRs because MOIC is identical, and carry is driven by MOIC so the GP's economics are unchanged
- Deal B has the lower IRR because returning capital early reduces the invested base on which the remaining return compounds
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