glossary

## Term Sheet

A term sheet is a non-binding legal document that outlines the basic terms and conditions of an investment transaction between two parties - typically between an investor and a startup seeking funding.

MOIC stands for Multiple on Invested Capital. It measures the performance of private equity and venture capital investments. MOIC shows how much value was generated per $1 of initial capital invested in a deal. It assesses the ROI in comparison to the initial capital investment put in.

For example, a MOIC of 3x means that for every $1 invested, $3 was returned. The higher the MOIC, the more profitable the investment. MOIC sets itself apart from metrics such as IRR by comparing cash coming in versus total cash outflows. This metric shows how an initial investment grows throughout a deal.

The formula for calculating MOIC is straightforward:

The formula for calculating MOIC is straightforward:

MOIC = Total Value Generated / Total Capital Invested

Where:

- Total Value Generated includes:
- The initial investment amount
- Any additional profits earned on the investment

- Total Capital Invested refers to:
- The initial amount of money put into the investment
- Total Capital Invested is just the initial amount invested.

- To break this down further, the initial investment amount is the total capital that was first contributed to the investment. This is the starting point.
- Profits earned include things like:
- Interest payments received
- Proceeds from the sale of the investment
- Any other earnings generated
- You add the initial investment + any profits earned to get the Total Value Generated

So in simple terms, MOIC tells you how much total value you generated per dollar of initial capital invested. A higher MOIC means your investment was more profitable.

Calculating MOIC is a straightforward process involving gathering key data points. Here are the steps:

**Gather the total value generated from the investment.**Add up the initial investment amount, any additional profits, interest earned, or proceeds from the sale of the investment.**Add up the total capital invested, which is the initial amount of money invested in**the investment.**Divide the total value generated by the total capital invested.**The result is the MOIC.

This shows that for every $1 invested, $3.50 in value was created - an excellent return. The higher the MOIC, the better the return for investors. But a higher MOIC in private markets often means higher risk as well.

A MOIC of 1 means the investment broke even - the total value generated was equal to the total capital invested. The investor earned their total initial investment back but did not make any gains.

A MOIC of 2 indicates that $2 in value was generated for each dollar invested. Investors prefer multiples as they signify returns. In the world of private equity, achieving a MOIC ranging from 2 to 3 times is seen as a good outcome. These investors usually aim for MOICs of >3x for their investments. They aim to boost their MOIC as much as possible when evaluating investment prospects. Many institutional investors, such as pension funds, target MOICs above 2x.

MOIC and IRR are two key metrics used to evaluate investment performance, but they measure returns in different ways:

**MOIC measures the total return on investment relative to the capital invested. It is a multiple that shows how much value was created per dollar invested.**For example, a MOIC of 3x means for every $1 invested, $3 was returned.**IRR, expressed as a percentage, measures the annualized rate of return on an investment.**The key differences between MOIC and IRR include:**MOIC does not consider the time period of the investment, while IRR factors in the time value of money.**MOIC is calculated based on total cash flows over the life of an investment, regardless of timing. IRR annualizes returns based on when cash flows occurred.**MOIC is simpler and easier to calculate, while IRR provides more context.**MOIC can be calculated with just a few inputs. IRR requires detailed cash flow projections and uses an iterative calculation. IRR is calculated annually enabling comparisons between investments of varying lengths.**MOIC indicates the return on invested capital while IRR reveals the rate of return.**While MOIC and IRR will show similar trends, the actual values can differ significantly. MOIC does not reveal if returns were consistent or varied over time.

Overall, MOIC and IRR provide complementary views on investment performance. Investors often evaluate both to get a full picture of investment success before making investment decisions. While MOIC is simpler, IRR provides critical context on the timing and consistency of returns.

TVPI (Total Value to Paid-In Capital) is another metric used to evaluate the performance of private equity funds. While related, they have some key differences:

**MOIC uses total invested capital while TVPI uses Called Capital**The MOIC ratio divides the total value realized by the total capital invested, including all capital committed to the fund. TVPI only looks at the capital the fund has called, excluding any remaining uninvested capital commitments.**MOIC includes profits, while TVPI only shows payments**In the MOIC calculation, the total value includes any profits, proceeds, and interest earned on the investments. It measures the total return. The TVPI ratio measures realized and unrealized investments in a fund in proportion to the total contributions—the paid-in capital [TVPI should include both realized and unrealized return]**Investors use both metrics to assess fund performance**Since MOIC considers total invested capital and TVPI reflects called capital, investors analyze both ratios together to evaluate the fund. MOIC shows the return multiple, and TVPI indicates how much has been returned to investors.

By understanding the difference between MOIC and TVPI, private equity investors can better analyze a fund's performance across its entire life cycle. Both metrics provide useful insights into investment returns.

Private equity firms widely use the MOIC metric to benchmark their investments' performance. Unlike other return metrics, MOIC shows the total multiple on invested capital generated by a PE fund's investment performance across its entire portfolio or for specific investments. This allows limited partners and other investors to see how much the total value of an investment has increased relative to the initial capital invested.

For private equity firms, calculating the MOIC demonstrates to LPs the investment multiples and overall return profile achieved. Since MOIC measures total returns relative to capital deployed, it provides a quick and comparable performance benchmark across PE funds and portfolio companies. A higher MOIC indicates greater value generated on the invested capital. Private equity investments are known for their long-term nature making MOIC a crucial metric for investors in evaluating the performance of PE funds.

In the private equity sector, hitting a net MOIC of 2-3x throughout a funds portfolio is considered the benchmark for success. For every $1 invested, the fund returned a total value of $2-3. Top-performing funds can reach MOICs of 5x or higher. When evaluating PE investments, LPs will look at both the gross MOIC at the fund level as well as the MOICs for specific portfolio company investments.

The MOIC metric provides a glimpse into how profitable an investment is relative to the capital invested. A greater MOIC generally indicates a profitable investment while a lower MOIC suggests a less profitable one. Usually, investments with a higher MOIC involve increased risk and uncertainty. Investments with higher MOIC values often involve risk and unpredictability. The increased possibility of losses offsets the promise of profits.

Alternatively, a lower MOIC investment could result in profits for investments with higher risk. For instance, an investment that yields a 1.5x return generates 50% more than the original investment. As such, when analyzing MOIC values, it's important to consider the level of risk. A 3x MOIC in a risky venture capital investment may not necessarily be "better" than a 1.5x MOIC in a safer bond investment. Investors should weigh the MOIC value against the risk profile to make informed decisions.

In summary, a higher MOIC indicates a more profitable investment but does not automatically mean a better investment. The MOIC return and successful investment strategy should be evaluated in the full context, considering risks. High and low MOIC investments can play a role in a balanced portfolio.

MOIC does not consider the timing of an investment's cash flows. Two investments could yield the same returns on invested capital, and exhibit significantly diverse cash flows throughout the duration of the ownership.

For instance, Investment A may yield the majority of its profits in the early years, whereas Investment B's returns may come later. Despite both investments potentially achieving a MOIC of 2 times, Investment A offered cash flows in the earlier stages compared to Investment B, which delivered higher cash flows later. This demonstrates why analyzing MOIC alone does not provide the full picture.

To accurately assess investment performance, investors should consider both the MOIC and the timing of cash flows. Even investments with MOICs can yield varying rates of return (IRR) due to different periods in which cash flows occur. The IRR considers the time value of money where cash flows received earlier hold value than those received.

To make fully informed investment decisions, private equity firms must analyze MOIC, IRR, cash flows, and other metrics. MOIC shows how much total value was created relative to capital invested, while cash flow analysis provides insight into the timing and duration of returns. Evaluating investments through multiple lenses leads to better portfolio management and asset allocation.

Multiple Invested Capital (MOIC) is a valuable metric for analyzing and comparing investment performance over time and across a portfolio of companies or assets. Investors can leverage MOIC in several ways:

**Assess investment performance over time**: By calculating a deal's MOIC at various points after the initial investment, investors can track how much value has been created relative to the capital invested. Comparing MOIC over time shows whether performance is improving or declining.**Compare potential investments**: When assessing new deals, MOIC can be projected to compare expected returns. When everything is considered equal, a higher expected MOIC suggests an appealing investment prospect.**Establishing MOIC goals for investments**: Investors might set MOIC objectives for investments or across their portfolio to measure performance. This sets a clear goal for investment teams.**Factor MOIC into fund return projections**: At the fund level, modeling expected MOIC for each prospective investment allows more accurate J-curve projections and measurement against return hurdles.

Using MOIC for analysis provides the private equity industry with a clear, intuitive metric to hone investment strategy and processes. Private equity firms can maximize value creation by setting MOIC targets and tracking performance against benchmarks.