hard · Private Equity paper-lbo
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 continuously at the multiple's annualized rate with no interim leakage of return over the full five-year hold period
- Both deals have identical IRRs because MOIC is identical, and since carried interest is driven purely by the multiple rather than timing, the GP's carry economics under either structure stay unchanged
- Deal B has the lower IRR because returning half the invested capital early via the recap shrinks the remaining invested base on which the second half must then continue to compound through to the final exit
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