An equity multiple without a holding period is half a number; solve it backwards from the IRR you need and the answer changes with every year of hold.
A good equity multiple is the one that delivers your target IRR over your holding period; there is no level that is good on its own. With 5 per cent of equity distributed each year, a 15 per cent IRR needs 1.92x over five years, 2.46x over seven and 3.53x over ten. An illustrative value-add deal returning 1.65x over five years earns 11.38 per cent; held seven years to reach the same multiple, it earns 8.33 per cent.
Worked in full in Private Equity Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The equity multiple, total distributions divided by equity invested, is the first number on most real estate investment memos and the easiest to misread. It measures how much money comes back and is silent on when. That makes it a useful check on an IRR, which can be flattered by early cash on a small cheque, and a poor yardstick on its own. The fix is to solve the multiple backwards from the return you need, with the property's running yield included, which is what separates this from a plain MOIC to IRR conversion. Every level below, including the labels attached to return targets, is illustrative rather than a market benchmark.
| Input | Value |
|---|---|
| Equity invested at closing | 20.0 |
| Annual distributions, 5% of equity | 1.00 |
| Holding period | 5 years |
| Net sale proceeds to equity, end of year 5 | 28.0 |
| Total distributions | 33.0 |
Equity multiple = total distributions ÷ equity invested
Multiple needed for a target IRR = n × y + [1 − y × annuity factor(r, n)] × (1 + r)n
where y is the annual distribution as a share of equity, r the target IRR and n the hold. With no interim cash it reduces to (1 + r)n. In Excel: =Total_Dist/Equity for the multiple and =IRR(Cash_Flows) for the return; the required exit is =(1-PV(r,n,-y))*(1+r)^n.
The trap in "13 per cent a year". A 65 per cent profit over five years looks like 13.0 per cent a year when divided by the hold. It is 11.38 per cent, because the profit arrives mostly at the end and the capital is tied up throughout. Dividing profit by years always overstates the return of a back-ended deal.
| Target IRR | 3 years | 5 years | 7 years | 10 years |
|---|---|---|---|---|
| 8% (core-plus) | 1.25x | 1.43x | 1.62x | 1.93x |
| 12% | 1.39x | 1.69x | 2.06x | 2.73x |
| 15% (value-add) | 1.50x | 1.92x | 2.46x | 3.53x |
| 18% (opportunistic) | 1.61x | 2.18x | 2.93x | 4.56x |
| Target IRR | 3 years | 5 years | 7 years | 10 years |
|---|---|---|---|---|
| 8% | 1.26x | 1.47x | 1.71x | 2.16x |
| 12% | 1.40x | 1.76x | 2.21x | 3.11x |
| 15% | 1.52x | 2.01x | 2.66x | 4.05x |
| 18% | 1.64x | 2.29x | 3.19x | 5.23x |
The tier labels are illustrative, not market targets. Two things stand out. Each extra year of hold raises the bar sharply, so a business plan that slips by two years needs a much larger exit to defend the same IRR. And current income lowers the multiple needed: a development deal with nothing paid until sale needs 2.01x for 15 per cent over five years, a stabilised value-add deal paying 5 per cent a year needs 1.92x.
| Hold | Exit, x equity | IRR |
|---|---|---|
| 3 years | 1.50 | 18.88% |
| 5 years | 1.40 | 11.38% |
| 7 years | 1.30 | 8.33% |
| 10 years | 1.15 | 6.13% |
Timing within the hold matters too. Over five years, 1.65x paid entirely at exit is 10.53 per cent; with the 5 per cent annual distributions it is 11.38 per cent. Keep those distributions, add a year-three refinancing that returns 0.55x of equity, leave less for the exit, and the multiple is unchanged at 1.65x while the IRR rises to 13.53 per cent. That is why sponsors like refinancings and why investors look at both numbers: the multiple did not move, so no extra profit was made, only earlier cash. How much of that comes from debt is worked in levered vs unlevered IRR.
The multiple also says something the IRR cannot: how much risk capital was at work for the return. Two deals at 15 per cent, one over three years at 1.50x and one over seven at 2.46x with the same yield, produce very different amounts of profit per dollar committed. An investor with capital to deploy, and a cost to finding the next deal, may prefer the longer hold at the same IRR. An investor who can recycle cash quickly into equally good deals will prefer the shorter one. Neither number settles that alone.
The common mistake is to treat a round multiple as a hurdle: "we target 2.0x". With a single exit the conversion is the n-th root of the multiple, worked for every hold in how to convert MOIC to IRR. Over three years that is about 25.99 per cent a year with all the cash at exit, over five 14.87 per cent, over seven 10.41 per cent. A 2.0x target that drifts from five years to seven has quietly become a core-plus return earned with value-add risk. The opposite mistake is chasing IRR alone: a 25 per cent IRR on a one-year flip is 1.25x, which may be a smaller profit in dollars than a 1.65x held for five.
Set the multiple from the target IRR and the hold, not the other way round. At 5 per cent annual distributions a 15 per cent target needs 1.92x over five years and 2.46x over seven; the illustrative deal's 1.65x over five is 11.38 per cent. Report both numbers, with the hold beside them. The free workbooks for this book compute IRR, TVPI and DPI from one cash-flow schedule, so the gap between the multiple and the return is visible on the same page.
It depends on the hold and on when cash comes back. With nothing paid until exit, 15 per cent compounds to 2.01x over five years and 2.66x over seven. With 5 per cent of equity distributed each year, the same IRR needs 1.92x over five years and 2.46x over seven, because cash received earlier compounds at the target rate.
Only once you know the hold. Over three years it is about 25.99 per cent a year if all the cash comes at exit; over five years about 14.87 per cent, which an illustrative value-add plan might target; over seven 10.41 per cent, closer to an illustrative core-plus return taken with value-add risk. The multiple alone cannot tell you which.
A refinancing returns capital earlier without adding profit. In the illustrative case, 1.65x over five years earns 11.38 per cent with 5 per cent of equity distributed each year and the balance at exit; keep those distributions, return 0.55x of equity through a year-three refinancing and the multiple is still 1.65x, but the IRR rises to 13.53 per cent.
This article is one calculation from Private Equity Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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