Professional investors often hear this term equity multiple would be thrown around. You may hear its equivalent of Moic or multiple on invested capital.

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• What is MOIC?

What is MOIC?

Professional investors often hear this term equity multiple would be thrown around. You may hear its equivalent of Moic or multiple on invested capital. You will also hear terms like cap rate being thrown around. So how do we anticipate the best mechanical financial measurement of a potential investment, notably in the commercial real estate space?

Well, first of all, let’s take a look at what an equity multiple really is. It’s essentially total distributions divided by total invested capital. So from this you can derive a percentage or a fraction and use it however you like within your standard economics and profile for your investments. But it does not take into account things like leverage and unleveraged. We like to look at leverage multiples compared with unleveraged multiples because sometimes for certain investors, not utilizing leverage is an investment opportunity and it’s also a safer risk profile.

In general, you’re never going to lose an asset for the most part if you do not have leverage on it. Remember, leverage only amplifies the direction. It amplifies the returns or the losses, so it will get you there faster. So it’s very similar to a Moic in that higher is better, a higher equity multiple is better than a lower one.

And then also we have to take into account asset specific risk profiles to determine the fitness of actually using an equity multiple. One of the downsides of it is that it does not use time frames. So it is by nature an inferior tool to an IRR or a proper cash flow forecast. For instance, if I told you a particular investment had a weight of two times, well, what does that mean? It doesn’t mean anything because the two times maybe over a two year whole period or a 30 year whole period, those are two very different investment objectives and two different yields on investment.

And so your cash flow forecast needs to determine what is the actual IRR of a specific investment. Hopefully this helps you better understand what an equity multiple really is and how to use it within the context of commercial real estate investing.