Equity Multiple

Federal securities rules have spelled out the formula as multiple of invested capital.

The SEC's 2023 private fund adviser rules defined multiple of invested capital as the unrealized value of a fund plus the value of all distributions, divided by the total capital investors contributed, and net MOIC as the same figure after all fees, expenses and performance-based compensation (88 FR 63206). A federal court vacated the rules effective June 5, 2024, and the SEC removed them from the regulations (89 FR 91252); the definition still describes the term as used for real estate offerings.

For a property you buy and sell yourself, the numerator is every distribution of cash flow plus your net sale proceeds after the loan is repaid, and the denominator is your cash in. Before the sale, the remaining value is an estimate, so an interim multiple is only as good as the valuation behind it.

Read the number against 1.0x. Exactly 1.0x means you got your money back and nothing more; anything below is a loss of capital, even if distributions arrived every month along the way. Because a dollar received in year one and a dollar received in year ten count the same, the multiple says nothing about the rate at which the investment earned.

A worked example shows the same multiple producing different IRRs.

Hypothetical: you invest $1,000,000. In case one you receive $50,000 a year for seven years and $1,250,000 from the sale at year seven, $1,600,000 in total, a 1.6x multiple and an IRR of about 7.8%. In case two nothing is paid until a $1,600,000 sale at year seven: still 1.6x, but the IRR falls to about 6.9%.

Stretch case two to ten years and the multiple is unchanged at 1.6x while the IRR drops to about 4.8%; collect the $1,600,000 in five years and it rises to about 9.9%. The multiple measures how much, the internal rate of return measures how fast. Illustration only, in round numbers; your own figures belong with your CPA.

It bites when a projected multiple counts returned capital as profit or hides fees.

Distributions in the numerator include your own capital coming back. FINRA Regulatory Notice 15-02 requires account statements for non-traded programs using the net investment method to say when part of a distribution is a return of capital, because it can read as earnings. Check whether a quoted multiple is gross or net of fees; the SEC marketing rule requires advisers to show net performance with at least equal prominence to gross.

In a DST much of the multiple can depend on the sale, whose timing is decided at the trust level, not by you; see DST illiquidity and exits and DST yield versus total return. If the sale proceeds roll into another exchange, tax is deferred again, so the cash multiple and the after-tax result can differ by years; the DST sale and your next 1031 covers that step.