Equity multiple
The equity multiple (MOIC) shows how many times over the investor gets back the equity they put in during the ownership period. It is calculated as the sum of everything the investor is paid out (ongoing dividends plus net sale proceeds) divided by the original equity contribution. A multiple of 2.0x means the investor has received twice what was put in; 1.0x means breaking even, and below 1.0x means a loss.
The equity multiple and the internal rate of return (IRR) are the two measures that investors in commercial property most often report together, because they answer different questions. The internal rate of return measures the annual, time-weighted return and rewards early payouts. The multiple measures the total amount of money returned, with no regard for time. Two investments can have the same internal rate of return but very different multiples: a property sold quickly at a good gain gives a high IRR, but perhaps a low multiple, while a property held for ten years can give a moderate IRR but a high multiple because the money has been at work for longer. That is why it is common to look at both: how efficient was the return per year (IRR) and how much money did we get back in total (multiple).
The multiple is strongly affected by the loan-to-value ratio. Because it is measured on the equity, gearing lifts the multiple in a rising market: the less equity put in against a given increase in value, the higher the multiple. The same tool amplifies the loss in a falling market. A high multiple achieved with high gearing therefore carries more risk than the same multiple on an unleveraged property, and must be read alongside the interest coverage ratio and the debt service coverage ratio.
In practice, the equity multiple is used a great deal in prospectuses for property syndicates and funds, where investors assess the expected return on their money over a planned holding period of typically 5 to 10 years. A target of 1.8-2.2x over a seven-year period is not unusual for a value-add project, but the figure is inseparable from the assumptions about rental growth, exit yield and financing in a discounted cash flow model. A multiple without a stated holding period and gearing says little on its own.
From Placepoint's dictionary: Equity multiple
More information: Store norske leksikon: egenkapital, Store norske leksikon: avkastning
English: Equity multiple (MOIC, multiple on invested capital).
Frequently asked questions
What is the equity multiple?
The equity multiple shows how many times over the investor gets back the equity they put in during the ownership period. It is calculated as everything the investor is paid out divided by the original contribution. 2.0x means you have received twice as much back as you put in.
What is the difference between the equity multiple and the internal rate of return?
The internal rate of return (IRR) measures the annual, time-weighted return and rewards early payouts. The multiple measures the total amount of money returned, with no regard for time. Two projects can have the same IRR but different multiples.
How does borrowing affect the multiple?
Because it is measured on the equity, borrowing lifts the multiple in a rising market and amplifies the loss in a falling one. A high multiple achieved with high gearing therefore carries more risk than the same multiple without debt.
What is a good equity multiple?
That depends on the holding period and the risk. For a value-add project over seven years, 1.8-2.2x is not unusual, but the figure is tied to assumptions about rental growth, exit yield and financing. A multiple without a stated holding period and gearing says little on its own.