What Is a Good IRR?
“Good” depends on the asset class, the leverage, and the hold. Here's what private equity funds actually underwrite to, how IRR translates to MOIC, and the answer an interviewer is really listening for.
The short answer
There's no single number — and that's the point
A “good” IRR only means something relative to the risk, the leverage, and the time horizon behind it. A private equity buyout fund typically underwrites new deals to a gross IRR of roughly 20-25%+ at the deal level, which nets down to the high teens for its limited partners after fees and carried interest. By contrast, long-run public equities return something like 7-10% a year — liquid, unlevered, and available to anyone. Everything PE does with leverage and operational work is aimed at beating that liquid benchmark by enough to justify the lockup.
So when an interviewer asks “what's a good IRR,” a bare number is the wrong answer. What they want is context: good relative to what asset class, at what leverage, over what hold? And they want you to reach instinctively for the relationship between IRR, MOIC, and time — because those three quantities are locked together, and understanding how is what separates a candidate who memorized a figure from one who understands returns.
Rough benchmarks
These are broad, order-of-magnitude ranges for framing an interview answer, not guarantees or targets for any specific fund. Actual results vary widely by vintage, strategy, and market.
The translation
IRR and MOIC, both directions
For a single-in, single-out deal, IRR is just the annualized growth rate of your MOIC: MOIC^(1/years) − 1. That means every MOIC maps to an IRR only once you fix the hold period. Learn the five-year column cold and know how the same multiple shifts as the hold gets shorter or longer.
| MOIC | 3-yr hold | 5-yr hold | 7-yr hold |
|---|---|---|---|
| 2.0x | ~26% | ~15% | ~10% |
| 2.5x | ~36% | ~20% | ~14% |
| 3.0x | ~44% | ~25% | ~17% |
The mental-math rule of thumb: on a five-year hold, anchor to 2.0x ≈ 15%, 2.5x ≈ 20%, 3.0x ≈ 25%, and interpolate — every extra 0.5x of MOIC is worth roughly five points of IRR. Read it the other way too: a fund quoting a 20% IRR on a five-year hold is telling you it roughly doubled-and-a-half its money.
Notice how the same MOIC produces a very different IRR across the columns. A 3.0x over three years is a ~44% IRR; the identical 3.0x stretched to seven years falls to ~17%. The multiple — the actual dollars returned — is unchanged; only the speed differs. That gap is the whole reason funds report both numbers, and it's the intuition the next two sections build on.
The levers
What moves IRR in an LBO
Sponsor returns come from a short list of levers. Knowing which ones are durable — and which merely flatter the annualized number — is what an interviewer is probing when they ask where the return comes from.
Leverage
Debt shrinks the equity check, so the same dollar of value creation lands on a smaller base. More leverage magnifies IRR on the way up — and losses on the way down. It's the single biggest reason LBO returns clear public-market benchmarks.
Debt paydown
Free cash flow sweeps against debt over the hold, so equity value grows even if enterprise value is flat. Every dollar of debt retired is a dollar that shifts from lenders to the sponsor's equity at exit.
EBITDA growth
Growing the business raises exit enterprise value at a constant multiple. This is the most defensible source of return — it doesn't depend on cheap debt or a friendly buyer, just operational improvement.
Multiple expansion
Selling at a higher multiple than you paid boosts both MOIC and IRR, but it's the least controllable lever — it depends on the market, not on you. Underwriting to multiple expansion is how deals flatter their projected returns.
Timing of cash flows
IRR is exquisitely sensitive to when cash arrives. Early distributions — a dividend recap or an accelerated sale — boost IRR sharply but barely move MOIC. Pulling cash forward is the cleanest way to lift IRR without creating any additional value.
The cleanest way to see these levers separately is returns attribution: decomposing total value creation into how much came from EBITDA growth, how much from debt paydown, and how much from multiple expansion. A candidate who can bridge entry equity to exit equity and name each contributor is demonstrating exactly the understanding this question is testing. Walk through a full decomposition in the returns attribution example, or trace the underlying arithmetic in the paper LBO example.
Watch out
IRR's traps — and how to frame them
The reinvestment assumption
IRR implicitly assumes every interim cash flow is reinvested at the same IRR — an assumption that rarely holds. For a high-IRR deal, that overstates the true compounding you'd actually achieve. Naming this shows you understand IRR is a modeling convention, not a law of nature.
Early-exit inflation
Because IRR annualizes, a quick flip produces a huge IRR on a small MOIC. A 1.5x in eighteen months is a ~30% IRR but only a 50% gain on the dollars invested. Interviewers use this to check whether you'll be seduced by the annualized number over the dollars returned.
Why funds quote both
A fund reporting only IRR could be hiding short holds and small multiples; one reporting only MOIC could be hiding a decade of dead money. Quoting IRR and MOIC together is the honest way to show both the speed and the size of the return — which is exactly why the interview answer is 'it depends, here's the pair.'
The interview-ready answer
“A good IRR depends on the asset class and the risk taken to get it. PE buyouts underwrite to roughly 20-25% gross, high-teens net — but I'd always want to see it next to the MOIC and the hold, because IRR alone can be inflated by leverage or an early exit. Real, durable returns come from EBITDA growth and debt paydown, not from betting on multiple expansion.”
FAQ
Good IRR questions
What is a good IRR in private equity?
For a private equity buyout fund, a good gross IRR is typically in the 20-25%+ range at the deal level, which nets down to the high teens for limited partners after fees and carry. Anything sustainably above the mid-20s gross is strong; below the mid-teens net starts to look unattractive relative to the risk and illiquidity LPs are taking on. The right interview answer, though, is that 'good' depends on the asset class, leverage, and hold period — a 20% IRR on a safe, lightly levered platform is more impressive than 30% on a deal that only works with aggressive multiple expansion.
Is a 30% IRR good?
A 30% IRR is very good in absolute terms — it roughly triples your money in about four years and doubles it in under three. But in an interview you should immediately ask what's driving it. A 30% IRR built on real EBITDA growth and debt paydown is excellent; a 30% IRR that depends on selling at a much higher multiple than you paid, or on a quick flip that inflates the annualized figure, is far less durable. High IRR with low MOIC is a flag, not a trophy.
How do you convert MOIC to IRR?
IRR for a single-in, single-out deal is just the annualized growth rate: MOIC^(1/years) − 1. In your head, anchor to a five-year table — 2.0x ≈ 15%, 2.5x ≈ 20%, 3.0x ≈ 25% — and interpolate. Every extra 0.5x of MOIC over five years is worth roughly five points of IRR. For other holds, remember that doubling your money (2.0x) takes about 26% over 3 years, 15% over 5 years, or 10% over 7 years: the same MOIC gives a higher IRR the faster you get it.
Why do PE firms use both IRR and MOIC?
Because each hides what the other reveals. IRR is time-sensitive, so it rewards speed — an early dividend recap or a quick sale can produce a gaudy IRR on a mediocre multiple. MOIC ignores time entirely, so a 3.0x over ten years and a 3.0x over four years look identical even though the second is a far better deal. Funds quote both so LPs can see the annualized return and the absolute dollars-back at the same time, and so neither metric can be gamed in isolation.
What IRR do PE firms target in an LBO?
Sponsors typically underwrite new buyouts to a gross IRR in the low-to-mid 20s — often cited as a ~20-25% target at entry — with an implied MOIC around 2.5-3.0x over a five-year hold. That's the underwriting hurdle, not the guaranteed outcome; deals are modeled to clear it with room to spare because leverage, exit timing, and multiples rarely cooperate perfectly. Net of fees and carry, that underwriting maps to high-teens returns for the fund's investors.
Knowing the number isn't computing it
In a live interview you'll have to translate MOIC to IRR in your head and say where the return came from — on the clock. Practice both with randomized, instantly-graded drills: new numbers every attempt, step-by-step feedback, timed like the real thing.
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