Is a 20% IRR Good in Private Equity? How to Answer

"Is 20% IRR good?" is the Google query every first-year asks after a paper LBO prints a round number. The interview-ready answer is never a tribal yes. It depends on risk, hold length, leverage, strategy, and whether the assumptions are honest.

The 30-second answer

"Twenty percent IRR can be attractive for a leveraged buyout if risk is moderate and assumptions are clean, but it is not universally good. Early-stage or heavy turnarounds often underwrite higher. Core real-estate-style risk would make 20% look aggressive. I judge IRR against the fund's hurdle, comparable deals, downside cases, and whether MoIC is adequate for the hold. If the 20% needs two turns of multiple expansion, I do not call it good."

Context checklist before you praise a number

Pair IRR with MoIC (non-negotiable)

IRR without MoIC hides hold-period games. A short hold with a quick dividend recap can print IRR. A long hold with the same IRR needs a higher equity multiple.

MoIC = Equity Inflows ÷ Equity Outflows (definitions vary slightly by shop)
IRR = annualized rate that sets NPV of equity cash flows to 0
Rough terminal-only: IRR ≈ MoIC^(1/n) − 1

Same 2.0x MoIC is roughly mid-teens over five years and mid-20s over three. That is why "20% IRR" without hold length is incomplete. Deep dive: MoIC vs IRR.

Worked intuition

Sponsor equity in: $100.
Exit equity in 5 years: $250 (2.5x MoIC).

Rough IRR ≈ 2.5^(1/5) − 1 ≈ 20%.

Now ask:

1. Was exit multiple flat to entry?
2. How much came from EBITDA growth vs debt paydown vs multiple?
3. What is the downside if exit multiple compresses one turn?

Attribution language matters. See returns attribution.

Fund hurdle vs deal underwriting

LP preferred return might sit around ~8% in many PE LPAs. Deal underwriting targets are often higher because the portfolio has losers, fees drag, and carry structure sits on top. A single deal at 15% might be acceptable in a diversified fund. A fund still needs a distribution of outcomes that clears LP expectations after fees.

Do not confuse:

• LP pref / hurdle
• Deal underwriting IRR target
• Marketing "we seek mid-20s" slide language

When 20% is weak

• Requires 1 to 2 turns of multiple expansion with no ops story
• Ignores working capital and real CapEx
• No downside case, or downside destroys equity
• Pref / structured equity above common eats the return
• Hold assumed unrealistically short to juice IRR
• Revenue growth pasted without customer or margin proof

When 20% is strong

• Conservative or flat exit multiple
• Clear ops levers (pricing, mix, cost, M&A bolt-ons with discipline)
• Delever path from real free cash flow
• Downside still equity-positive and clears a softer IRR
• Risks named: customer concentration, cyclicality, refi

Strategy-dependent "good"

Follow-ups

30-second verbal (alternate)

"Twenty percent is not a magic number. For a standard LBO I like it if risk is underwritten and MoIC fits the hold. I always ask what drives it: ops, delever, or multiple. If multiple expansion is the story, I haircut it before I call the return good."

Practice drills

Drill 1: Given MoIC and hold, estimate IRR without a calculator habit (paper LBO tables help).
Drill 2: Take a 20% case and remove multiple expansion; recompute story.
Drill 3: Explain why a 3-year 20% and 5-year 20% are different investments.
Drill 4: Write a 30-second answer for buyout vs for growth equity.
Drill 5: Run paper LBO problems until MoIC/IRR fluency is automatic.

Practice on SheetRank

Build Apollo-style cases, then grade yourself: is the IRR "good" only because the exit multiple bailed you out? If yes, fix the story before you say the number in an interview.