Investment approach
Equity Multiple vs IRR: Which Metric an Investor Should Watch
Equity multiple shows the scale of the result, IRR shows the speed. Two projects show how they rank the same deals differently and at what reinvestment rate the gap disappears.
Equity multiple (EM) is how many euros came back for every euro invested: 1.5x means €150,000 came back on €100,000. IRR shows speed, EM shows the scale of the result. An investor in a real estate project needs both, because on their own they rank the same projects in opposite order.
What equity multiple shows and what IRR shows
EM = all money received / all money invested. Time does not appear in the formula. ROI is tied to it simply: ROI = EM − 1, so 1.5x is an ROI of 50%.
IRR answers a different question: at what annual rate the money grew while it was in the project. The article on IRR in plain English explains how the metric works. In private fund reporting, the same metric that is called EM here is known as TVPI: the sum of distributions and current valuation divided by the amount invested. Ludovic Phalippou, writing on the CFA Institute Research and Policy Center blog on 8 November 2024, says IRR on its own is not the same as the return on invested capital, and that in the materials he reviewed it was presented without other metrics. He cites TVPI alongside it as one such measure.
| Investor's question | What to look at |
|---|---|
| How many euros do I get back per euro invested | EM |
| How fast is my money growing | IRR |
| How much will I earn in euros | Profit = (EM − 1) × amount invested |
| How much capital has to be held at once | Peak capital requirement |
Two projects, two different winners
Worked example, not a forecast. €500,000 is invested in each.
| Project | Term | Returned, € | EM | IRR |
|---|---|---|---|---|
| X | 5 years | 750,000 | 1.50x | 8.4% |
| Y | 2 years | 650,000 | 1.30x | 14.0% |
By EM, X wins; by IRR, Y wins. Which choice is better depends on one question: what you will do with the money after Y.
For Y to catch up with X over a five-year horizon, its €650,000 has to grow at about 4.9% a year for the remaining three years: 1.3 × 1.049³ = 1.5. If the money goes into a 4% placement after Y, the result is 1.46x, slightly below X. At 6%, the result is 1.55x and Y wins. The 4.9% threshold is the answer to the "EM or IRR" question: IRR is right when you will actually find a use for the money above that threshold, and wrong when you will not.
To put projects on one term, set a rate for placing the returned money and bring both projects to the same date. At 4%, Y gives 650,000 × 1.04³ ≈ €731,000; at 6%, about €774,000. X gives €750,000 in both cases. Below the threshold X is ahead, above it Y is ahead. The rate itself remains an assumption, and without it the results cannot be compared.
Which metric a real estate investor should watch
Both, plus the profit in euros. But the priority shifts with the situation.
IRR matters more when capital is limited, there are many projects and each new one is waiting for free money. Then every idle month costs you the next project.
EM matters more when a replacement is hard to find: getting into a deal takes months, a good property turns up rarely, and the costs of a new cycle (purchase taxes, lawyers, search) eat part of the effect. In real estate this is a common case. Money that came back after two years does not turn into a new project the next day.
The third number people forget is the peak capital requirement: how much money must be invested at one time, even if part of it comes back later. A breakdown is in the article on the full cost of a project.
Where EM misleads
An investor's EM is calculated on everything received: interim payments plus the final return, divided by the amount invested. Forgetting the first understates the result of a project with early payouts.
EM knows nothing about time, so any project can be improved just by holding it longer. A property rented out for ten years will show a large EM thanks to the rental income, and without IRR or net present value the number is useless.
A project's EM and an investor's EM differ. Taxes, fees and other participants' shares sit between them. To compare, calculate both metrics on the money that actually reached you, not on the project's profit. How this ties to the contract terms is covered in the article on project return and investor return.
And one last limit: an EM built on forecast figures remains an assumption. If the sale price in the model is optimistic, the EM looks good and promises nothing.
The metrics DNPI Capital uses for a project are set out on the /methodology page: it defines ROI and annual return, and EM and IRR are not described.
Questions and answers
What is equity multiple in simple terms?
It is the ratio of all the money that came back to all the money invested. An EM of 1.3x means that each euro invested returned €1.30, so 30 cents were earned.
How does equity multiple differ from ROI?
Only in how it is written. ROI = EM − 1, expressed as a percentage. An EM of 1.3x and an ROI of 30% describe the same result.
What equity multiple counts as good?
There is no universal bar, and I will not invent one. 1.3x in one year and 1.3x in five years differ many times over, so EM is always read next to the term and IRR.
Can I choose a project by IRR alone?
You can, if you have a specific use for the returned money. Without it, a high IRR on a short project only means a fast payback, not more euros earned.
