Does anyone have MOIC and IRR targets for investors?

November 25, 2020

by a searcher from Emory University in Atlanta, GA, USA

I'm putting together a model to determine the size of company I would like to purchase. I'm wondering if anyone has any experience on what return investors are looking for with ETA type investments. Is there a good range and minimum investment size investors are looking to make?

With the equity I can put down, I'm looking for a small investments of ~$50-150k from investors and trying to determine what's a reasonable assumption for how much equity they would want in a 650K SDE business.

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Reply by a searcher
from Columbia University in Fairfax, VA, USA

MOIC is generally less relevant when dealing with institutional investors, because it doesn’t factor in timing of cash flows. Investors typically target an IRR in the 30-35%+ range in Search Fund deals. That's not to say MOIC isn't important - it absolutely is. But institutional investors usually have LPs of their own and operate under a fund lifecycle (often 8–10 years). So if you deliver a 5x MOIC, but it takes 15 years to do so, that doesn’t hit their return hurdle (that translates to a ~17–20% IRR). So when modeling returns for institutional capital, IRR should be your primary benchmark. If you’re raising money from family and friends, you’ll often have more leeway and flexibility around timeline and return profile.

Reply by a searcher
from University of Toronto in Toronto, ON, Canada

Generally, we see interest at 30%+IRR but with reasonable assumptions baked into projection model. Sophisticated investors would vet all assumptions on risks, growth, FCF, and debt serviceability, while stress testing some downturn exposure. As for check size, some investors reflect on how much control/power they have to steer the asset while operators may either value autonomy or 'smart' money. If you are new to an investor, expect small amounts but it'll depend on the risk profile of the target, your competence in the space, debt/equity assumptions etc etc. If you start out with min check size of $50k with a few $100ks in there it'll be a decent cap table and you should have success in the raise.

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