IRR by Eye
When a partner says “2.5x over five years”, the reply they are waiting for is “about 20%”, and they are waiting for it before the sentence ends. Nobody takes a fifth root in their head. What they carry is a ladder of memorised rungs and a feel for the gaps between them. Ten rounds, holds from 3 to 7 years, and every third round asks the other way round: given the IRR, what multiple.
Warm up here, then put the conversion at the end of a real deal in the Paper LBO Trainer.
Ten rounds. Each shows a multiple and a hold, and you type the IRR. Every third round turns it around and asks for the multiple from an IRR. Type the number and press Enter; the exact figure and the nearest rungs on the ladder appear after each answer.
Holds of 3 to 7 years, multiples from 1.3x to 5.0x. The clock is off unless you turn it on.
The ladder
| Multiple | 3 years | 5 years | 7 years |
|---|---|---|---|
| 1.5x | 14.5% | 8.4% | 6.0% |
| 2.0x | 26.0% | 14.9% | 10.4% |
| 2.5x | 35.7% | 20.1% | 14.0% |
| 3.0x | 44.2% | 24.6% | 17.0% |
| 4.0x | 58.7% | 32.0% | 21.9% |
| 5.0x | 71.0% | 38.0% | 25.8% |
The rule of 72 and how to interpolate. Money doubles in roughly 72 divided by the rate years, so a 2.0x over 5 years is about 14% by the rule and 14.9% exactly; over 3 years the rule says 24% against 26.0%. The rule drifts as rates climb, which is why the rungs above are worth memorising rather than deriving. Between rungs, go straight-line: 2.25x over 5 years sits halfway between 2.0x (14.9%) and 2.5x (20.1%), so call it 17.5%; the exact figure is 17.6%. The error from straight-line interpolation is always under a point at these sizes, well inside what an interviewer is listening for.
Why the hold matters as much as the multiple. A 3.0x over 3 years is a 44% IRR; the same 3.0x over 7 years is 17%. The multiple says how much money came back, the IRR says how hard each pound worked per year, and a fund paying carry above an 8% hurdle and reporting a since-inception IRR to its investors is judged on the second. Two deals with the same headline multiple can sit on opposite sides of a fund’s target.
Learn the 5-year column first, since five years is the hold most models assume. The 3 and 7 year columns then bracket almost every deal you will be asked about, and a 4 or 6 year hold is roughly the midpoint of its neighbours.
Keep going
All labsNext in Corporate Finance · 60 min
LBO Modelling Test
The one-hour test, with marking. Sources and uses, a five-year operating model, a debt schedule with a cash sweep, exit and returns. Build it in the browser block by block, or download the workbook, build it in your own spreadsheet and upload it to be marked line by line.
Deal Simulations · 15 min
Capital Stack Challenge
Finance a real buyout. Size the revolver, term loans, notes, PIK and equity against the lender caps of the day, hold the structure through a shock, then see how the sponsor actually did it, with every figure linked to the filing.