What is the Rule of 72?

Published On - June 10, 2023

Josh Corporate Banking / Commercial Banking / Private Debt, Corporate Development, Financial Modeling, FP&A, Investment Banking, Private Equity

The rule of 72 allows you to approximate how many years it takes to double your equity investment at a given IRR.

Alternatively, the rule of 72 allows you to approximate the IRR required to double your equity investment.

The formula is as follows:

Number of years to double = 72% ÷ IRR

OR

IRR = 72% ÷ # of years to double

For example, if a PE firm expects to double their equity investment (ie earning a multiple of capital of 2x) over 3 years, then they would be earning an IRR of approximately 72% ÷ 3 = 24%.