Equity multiple
Also called EM, Multiple on invested capital, MOIC.
The equity multiple is total distributions divided by total equity contributed, expressed as a multiple. A 2.0x means an investor received two dollars back for every dollar put in, counting the original dollar.
How it works
It is the plainest return measure in the business and the one that survives translation. It ignores time entirely, which is simultaneously its weakness and the reason it is indispensable: a measure that ignores time cannot be improved by changing the assumed hold period, so it is much harder to engineer than an IRR.
Read it as the answer to how much money was made rather than how fast. A 1.0x is break-even in nominal terms and a loss in real terms. Anything below 1.0x means capital was not returned. The multiple should be quoted with the hold period beside it, because a 1.8x over three years and a 1.8x over nine years are not remotely the same investment.
Two conventions need stating whenever a multiple is quoted. Gross or net of fees, asset management fees and promote is the first, and the gap between the two is often 0.2x to 0.4x. Whether unfunded commitments count in the denominator is the second, which matters on a deal with staged capital calls.
Formula
Equity multiple = total distributions / total contributions- Distributions include operating distributions, refinance proceeds and sale proceeds
- Contributions include the initial equity plus every subsequent capital call
- Net multiple is after fees and promote; gross is before. Always say which
Worked example
Illustrative. $10,000,000 of equity in both deals.
| Deal A distributionsall at the end of year five | $16,400,000 |
|---|---|
| Deal A equity multiple | 1.64x |
| Deal A IRR | 10.40% |
| Deal B distributionsall at the end of year two | $16,400,000 |
| Deal B IRR | 28.06% |
| Deal B equity multiple | 1.64x |
Identical multiples, wildly different IRRs. An investor who cannot redeploy the capital quickly is largely indifferent between them; one who can is not. The multiple is the part that does not depend on that judgement.
The common mistake
Comparing a gross multiple to a net one
Sponsor marketing frequently reports a deal-level gross multiple while an investor's realised experience is net of an asset management fee, an acquisition fee and the promote. On a deal with a 20 percent promote over an 8 percent preferred return, the gap between the two can exceed 0.3x, which is the difference between clearing a fund's target and missing it. Ask which one you are being shown, and if the answer is unclear, rebuild it from the distribution waterfall.
Related terms
- Internal rate of returnThe internal rate of return is the discount rate at which the net present value of a deal's cash flows equals zero. It expresses a full investment, including the timing of every contribution and distribution, as a single annualised percentage.
- Cash-on-cash returnCash-on-cash return is a year's cash flow after debt service divided by the total equity invested. It measures the current income yield on the money actually at risk, ignoring appreciation and any eventual sale.
- PromoteThe promote is the general partner's share of profits in excess of its pro rata capital contribution, earned once the limited partners have received their capital back plus the preferred return. It is the performance compensation in a real estate partnership.
- Distribution waterfallA distribution waterfall is the ordered set of tiers that determines how cash is split between limited and general partners. Each tier is filled completely before any money reaches the next one, and the general partner's share rises as it goes.
- Preferred returnA preferred return is a threshold rate of return that limited partners receive on their capital before the general partner participates in profits beyond its own pro rata share. It is a priority in the distribution queue, not a promise that the money will be there.
- Going-in versus exit cap rateThe going-in cap rate is year-one NOI divided by the purchase price. The exit or terminal cap rate is the rate applied to the forward NOI at the end of the hold to estimate the sale price. The spread between them is one of the largest and least evidenced assumptions in any underwriting.
Every figure, traced to its source
Altyst computes these in exact decimal arithmetic, not with a language model, and clicking any number shows the formula behind it.