What is an Equity Multiple?
In a syndication, the equity multiple is a quick metric used to understand the potential ROI. It represents the total money returned to investors, including the initial investment and any profits earned relative to the initial investment amount.
To calculate the equity multiple in a syndication, we divide the total distributions to investors by the total equity invested. The formula for calculating the equity multiple is:
Equity Multiple = Total Distributions / Total Equity Invested
For example, if we raise $1 million in equity from investors, and the total distributions to investors over the project’s life are $2.5 million, the equity multiple would be 2.5x.
On the reverse, when evaluating marketing material for a syndication with an equity multiple of 2.5x, that means for every dollar an investor invests, they would expect to receive $2.50 in total distributions, including the initial investment amount and any profits earned. The higher the equity multiple, the greater the potential return on investment for investors.
However, an equity multiple doesn’t account for the value of time. Don’t be fooled by a 4x equity multiple if the investment timeline is ten years. A more attractive investment would be one that offers a 2.5x equity multiple with a 5-year timeline.
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