SS105: IRR vs Equity Multiple

It is common to see the Internal Rate of Return (IRR) mentioned in private equity deals; the issue being, the IRR is able to be manipulated and could possibly mislead investors. In this episode, Charles discusses why the Equity Multiple should always be taken into consideration when reviewing a potential investment opportunity.

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Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing IRR vs Equity Multiple.

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In episode SS-78, I explained what is equity multiple, but in this episode, I want to compare internal rate of return IRR vs Equity Multiple in more depth.

What is internal rate of return? Well, the IRR account for the time value of money, a dollar today is worth more than a dollar in the future. And the longer it takes to realize that future dollar, the less valuable it becomes, the IRR expresses the compounded annual percentage rate every dollar earns. While it is invested, most investors will utilize the IRR in order to compare different private equity offerings with other investments like stocks, mutual funds, etc. On another side, note IRR is not the same as annualized return and you cannot accurately compare an annualized return with the internal rate of return. But that is for a completely different episode. The main point with IRR is that it’s time dependent. You invest $100,000 and you profit $50,000 in two years versus profiting $50,000 in four years. The two year deal will have a higher IRR.

So what is equity multiple? Well, the equity multiple illustrates the amount of money that an investor will receive back at the end of the investment. You invest $100,000 into a deal and receive back $150,000. In total, the equity multiple is 1.5 x. Now, the equity multiple reflects the investments true impact on wealth, and that’s the most important part here. The issues with relying solely on the IRR. Is the IRR only tells the investor part of the equation. The old private equity saying is IRR can’t be spent. And it’s completely true. Private equity investors are able to find many short-term investment opportunities with high IRRs, but in most cases they do not generate sizable wealth. For example, you find an investment offering that will provide a 20% IRR over three months. That’s great, but that is really only a total return of 5% 1.05 x multiple. You’re not generating any wealth for that and for the time required for you to make that investment, it really becomes almost a loss depending on the size of your investment. The true potential of real estate investing is found in long-term capital gains, not short-term profits. Equity multiples, multiplying capital generates real wealth. So I hope you enjoyed. Please remember, rate, review, subscribe, submit comments and potential show topics at Look forward to two episodes next week. See you then.

Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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