At Gala Capital, we approach private equity valuation with a strong emphasis on analytical rigor, downside awareness, and long-term value creation. In an environment marked by higher interest rates, tighter liquidity, and increased dispersion in returns, understanding how value is measured and where metrics can mislead is critical.
Valuation in private equity goes far beyond headline prices or simple profit figures. Investors, fund managers, and analysts rely on a set of core financial metrics to assess deal attractiveness, compare opportunities, and evaluate performance over time. Among the most widely used are EV/EBITDA, IRR, and MOIC.
Each metric answers a different question: how expensive a company is relative to its operating performance, how efficiently capital compounds over time, and how much value is created in absolute terms. Used correctly and in combination, these metrics form the backbone of disciplined private equity analysis.
EV/EBITDA: Entry and Exit Valuation Benchmark
What is EV/EBITDA?
Enterprise Value to EBITDA (EV/EBITDA) is a valuation multiple that compares a company’s total enterprise value (equity value plus net debt) to its earnings before interest, taxes, depreciation, and amortization.
In private equity, EV/EBITDA is primarily used to:
- Benchmark entry and exit valuations.
- Compare companies across the same sector.
- Assess whether a deal is priced at a premium or discount to peers.
Why EV/EBITDA matters in private equity
Unlike price-to-earnings (P/E), EV/EBITDA neutralizes differences in capital structure, making it especially useful in leveraged buyouts (LBOs). Because PE transactions often involve significant debt, enterprise value provides a more complete picture of the total value paid for the business.
A key driver of private equity returns is multiple expansion, buying a company at a lower EV/EBITDA multiple and exiting at a higher one. However, reliance on multiple expansion alone can be risky, especially in tightening credit conditions or cyclical downturns.
Limitations of EV/EBITDA
- EBITDA is an accounting proxy, not cash flow.
- Ignores capital expenditures and working capital needs.
- It can mask operational weaknesses in capital-intensive businesses.
As a result, EV/EBITDA should be interpreted alongside cash flow metrics and leverage ratios.
IRR: Time-Weighted Performance Metric
What is IRR?
The Internal Rate of Return (IRR) measures the annualized return of an investment, considering the timing of cash inflows and outflows. In private equity, IRR reflects how quickly value is generated and returned to investors.
Why is IRR central to private equity?
IRR is particularly important in PE because:
- Capital is deployed and returned unevenly over time.
- Fund lifecycles are finite.
- Early exits can dramatically boost reported performance.
A higher IRR generally signals more efficient capital deployment, especially when compared across funds with similar strategies and risk profiles.
Limitations of IRR
Despite its popularity, IRR has well-known drawbacks:
- Sensitive to early cash distributions.
- Can overstate performance on small or short-lived investments.
- Assumes reinvestment at the same rate, which may be unrealistic.
For this reason, IRR should never be evaluated in isolation.
MOIC: Absolute Value Creation
What is MOIC?
Multiple on Invested Capital (MOIC) measures how many times the original investment has been returned, regardless of time. For example, a 2.5x MOIC means that every dollar invested generated $2.50 in total value.
Why MOIC matters?
MOIC provides a clear, intuitive view of value creation and is especially useful for:
- Comparing deal outcomes within the same fund.
- Evaluating long-duration investments.
- Complementing IRR analysis.
In long-hold strategies or infrastructure-style private equity, MOIC often provides more insight than IRR alone.
Limitations of MOIC
- Does not account for the time value of money.
- A high MOIC achieved over many years may still imply a modest IRR.
This makes MOIC most powerful when paired with time-based metrics.
Comparing EV/EBITDA, IRR, and MOIC
| Metric | Primary Use | Strength | Key Limitation |
| EV/EBITDA | Valuation benchmarking | Comparable across firms | Ignores cash flow quality |
| IRR | Time-weighted performance | Captures the speed of returns | Sensitive to timing |
| MOIC | Absolute value creation | Simple and intuitive | Ignores time |
In practice, sophisticated private equity analysis uses all three metrics together. EV/EBITDA frames valuation discipline, IRR measures efficiency, and MOIC captures total value creation.
Practical Takeaways for Investors
- Strong returns typically combine operational improvement, deleveraging, and disciplined entry and exit multiples.
- High IRR without meaningful MOIC may signal short-term financial engineering.
- High MOIC with low IRR may indicate capital tied up too long.
Understanding the interaction between these metrics helps investors avoid misleading conclusions and better assess risk-adjusted performance.
Conclusion
EV/EBITDA, IRR, and MOIC are foundational tools in private equity valuation and performance analysis. Each offers a distinct perspective on value, and none should be interpreted in isolation. EV/EBITDA anchors valuation discipline, IRR captures the efficiency and timing of capital deployment, and MOIC reflects total value creation.
At Gala Capital, we view these metrics as complementary, not as standalone indicators. Sustainable private equity returns are driven by operational improvement, prudent leverage, and realistic exit assumptions, not by financial engineering or short-term multiple expansion.
For investors navigating increasingly complex private markets, mastering how these metrics interact is essential to separating durable performance from headline-driven narratives.
