Equity Multiple
A return metric which shows how much an investor earned on his or her invested capital. The equity multiple (EMx) is calculated by dividing the sum of all capital inflows (capital distributions) by the sum of all capital outflows (capital contributions). While the equity multiple does not account for the time value of money, it does describe the total cash returned to the investor and is thus often utilized alongside the internal rate of return in real estate investment analysis.
An alternative calculation method for traditional Equity Multiple is to add the total investment profit to peak capital invested and divide this by peak capital invested. This method generally produces the same resulting value as the total inflows divided by total outflows calculation.
Equity Multiple or EMx is often referred to as Multiple on Invested Capital or MOIC in other areas of finance and occasionally in commercial real estate.
The Equity Multiple is typically used in conjunction with other return metrics such as Internal Rate of Return, Cash-on-Cash Return, Free and Clear Return, and Average Rate of Return, among others. The equity multiple can be calculated before and after taxes and on an unlevered (without debt) or on a levered (with debt) basis.
Putting ‘Equity Multiple’ in Context
Scenario:
Horizon Pension Fund has partnered with a national land development operator to pursue a programmatic land development strategy. This strategy involves acquiring large tracts of raw land in growing suburban and exurban markets across the U.S., primarily in Texas, Florida, Arizona, and Georgia. The pension fund is targeting a 2.0x unlevered equity multiple over a 7-year investment period. This means that Horizon expects to double its invested equity over the 7-year hold period, excluding any leverage, based purely on the profits from land appreciation and development sales.
Investment Overview:
The first phase of this programmatic strategy, known as the Rolling Acres Development Portfolio, consists of purchasing a 500-acre site outside of Dallas, TX for $10 million. The fund contributes 100% of the equity for this project, intending to subdivide the land into residential lots, sell them to homebuilders, and generate cash distributions through staged lot sales. Over the course of seven years, Horizon anticipates that the value of the land will increase due to regional housing demand, infrastructure development, and population growth in Dallas.
Equity Multiple Focus:
Horizon Pension Fund’s primary performance metric for this strategy is the unlevered equity multiple. They aim for an equity multiple of 2.0x, which indicates that for every dollar of equity invested, the fund expects to receive two dollars in return—doubling their capital.
Let’s break down how this works in the context of the Dallas land investment:
- Initial Investment (Capital Outflows): Horizon invests $10 million to acquire the land and cover initial development costs.
- Capital Inflows: Over the 7-year hold period, they plan to generate $20 million in total lot sales, as suburban homebuilders purchase the subdivided lots. The $20 million includes both the return of the original investment and profits from the sale of the land.
The equity multiple is calculated as:
Equity Multiple = Total Capital Inflows ÷ Total Capital Outflows = 20,000,000 ÷ 10,000,000 = 2.0x
This unlevered equity multiple of 2.0x signifies that Horizon will have doubled its initial investment of $10 million over the 7-year period. Importantly, this metric does not take into account the time value of money (as the Internal Rate of Return, or IRR, does), but it provides a clear picture of total cash returns relative to the capital invested.
Programmatic Strategy:
Horizon’s strategy is to replicate this model across multiple markets, gradually deploying additional equity to new land investments across other growing suburban regions. By doing so, the pension fund expects consistent returns across different geographic locations, all while keeping its focus on equity multiple as the key indicator of success.
While the 2.0x equity multiple is a useful metric for determining the total cash returned on the investment, Horizon also monitors other metrics, like IRR, to ensure the timing of cash flows meets their long-term return expectations.
Frequently Asked Questions about Equity Multiple (EMx)
What is the Equity Multiple (EMx)?
Equity Multiple, or EMx, is a return metric that shows how much an investor earned on their invested capital. It is calculated by dividing the total capital inflows (distributions) by the total capital outflows (contributions).
How is Equity Multiple calculated?
The formula is:
Equity Multiple = Total Capital Inflows ÷ Total Capital Outflows
For example, if an investor contributes $10 million and receives $20 million in total distributions, the EMx is 2.0x.
Does Equity Multiple consider the time value of money?
No. The Equity Multiple does not factor in the time value of money. It purely reflects total cash returned relative to invested capital. For time-sensitive returns, investors use IRR.
What does a 2.0x Equity Multiple mean?
A 2.0x EMx means the investor received double their initial capital investment. For every $1 invested, $2 was returned in total.
Is EMx the same as MOIC (Multiple on Invested Capital)?
Yes. EMx and MOIC are interchangeable terms. Both refer to the ratio of total cash returned to total equity invested.
What’s the difference between unlevered and levered Equity Multiple?
Unlevered EMx excludes debt and reflects total return on equity only. Levered EMx includes debt in the project, capturing how financing affects returns to equity holders.
How was EMx applied in the Horizon Pension Fund case study?
Horizon Pension Fund targeted a 2.0x unlevered EMx over 7 years by investing $10 million and projecting $20 million in lot sales from a land development project outside Dallas, TX.
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