When Is MOCC a Better Indicator of Performance Than IRR?

The internal rate of return (IRR) is often the conventional measure of performance in private markets. However, as many CFAs will attest, there are instances when other measures may be more appropriate. In this short paper, we will explore one such alternative, the multiple on committed capital (MOCC), which has become our private debt team’s preferred performance measure.

MOCC

MOCC compares a portfolio’s earnings (in dollar terms) with the investor’s commitment amount. Two key factors drive it:

• Investment level income—Since income is only earned on dollars invested, increasing the amount of money at work and maintaining that level can help maximize income.
• Deployment speed—The faster the better. Rapid deployment allows investors to maximize their capital at work (and income) in a shorter period of time.

We have found MOCC is most useful in the following circumstances:

• When evaluating asset classes that have lower return targets;
• When commitments need to be backed by liquid assets (lest investors incur a capital charge); or
• When an LP is either ramping up or making changes to their strategic asset allocations.

IRR

IRR estimates the profitability of investments. It is driven by the timing and size of cash flows and can be helpful when comparing GPs. IRR is best used to evaluate direct investments, mature client portfolios, and asset classes with higher target returns, like private equity. IRR is not as thorough as MOCC in assessing the actual monetary gains of an investment because it does not account for uncalled capital, thereby hiding the opportunity cost of suboptimal deployment levels. Further, subscription lines and leverage can distort IRR.

Comparing the Two

The amount of money generated during a holding period determines how an investment performs. While MOCC is more concrete than public market equivalents, it is not a widely adopted measure. MOCC is useful because it is not influenced by the holding period: earnings are simply summed up. Therefore, two investments generating $10 million will show the same MOCC irrespective of their investment period. In addition, because investors must reserve their commitment amount to serve any capital calls they might receive, uncalled capital represents a large opportunity cost for investors. IRR does not consider this opportunity cost, which can result in less confident decision making.

Figure 1 illustrates these potential two advantages.