What is an Equity Multiple?
Equity multiple is the total return of a deal, plus initial investment, divided by initial investment. What it measures is basically how much of a multiple did you get on your investment.
Here is the formula:
Equity Multiple = (Total Return + Initial Investment) / Initial Investment
Let’s run an example of that. Let’s say you invest $100,000 into a property. 5 years later, the property sells and you make $80,000 in total profits, plus you get your original investment of $100,000 back, leaving you with $180,000 (total returns plus initial investment).
Out of that $180,000 your original investment was $100,000. To calculate the equity multiple, you simply take the total money returned including your original investment and divide it by the original investment you made.
Equity Multiple = $180,000 / $100,000 = 1.8x Equity multiple.
In that example, you basically got your money back plus 80% total profits, which is translated into 1.8x equity multiple.
How Does an Equity Multiple Differ from IRR?
Equity multiple and IRR are very different metrics. Equity multiples don’t take time into account, whereas IRR does.
Back to our original example, that 80% total return happened over 5 years. As an equity multiple, the time frame doesn’t matter, but with IRR, the percentage would change depending on how fast or slow you received those returns. The sooner the returns hit your bank account, the higher the IRR goes due to the time value of money. You can read more on IRR here.
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