CRE Analyst’s Post

Different investors may emphasize different metrics, but there is no investor base out there, to my knowledge, that doesn't care about time-bounded returns. 2.0X Equity Multiple in 100 years wouldn't be the target for anyone.

Pre-pandemic with respect to office building sales the IRR was king although people certainly looked at equity multiple and to a lesser extent cash on cash. Today, investors I speak to are more focused on equity multiple and cash on cash.

This post makes a lot of sense. Using one way to measure returns is a mistake. I find when you take things to the extreme, you can see the problems created by any one metric. I would add these examples You can generate a 44% IRR by making a profit of $1,000 on a $1,000,000 investment if the investment lasts one day. That is a 1.001 Equity Multiple. If there is any probability greater than zero that this investment goes bust, it could be a horrible mistake even with a great IRR. Conversely a 2.0 Equity Multiple over 100 years gives you 0.7% IRR. Nobody would get excited about that!

So in effect IRR reflects the time value of money, first principles…no different to comparing a static feasibility to IRR. The flags are the impacts of using that as the performance metric as opposed to cash, multiples, profit margin, EIRR, etc. In reality they all have there own flags. Most LPTs leveraged up prior to GFC and used EIRR to squeeze the return. Macquarie Bank bought key infrastructure (e.g. airports, roads, communications) leveraged them as high as fiscally allowable at the time (high) to achieve ROEand then the world banking system collapsed…and round we go…

I’ve heard investors say that they focus on equity multiple, but they adjust their target for what’s good based on the hold period — which is effectively a backdoor utilization of IRR! There’s a direct mathematical relationship between the two: in the simple case of all distributions at the end of the hold period, it’s just (100%+IRR)^years = multiple. If folks get their money back sooner, sure they “made less wealth” but they can reinvest. If you invest in two higher IRR but lower multiple deals in the same time frame as one lower IRR but higher multiple deal, you’ll “make more wealth” in the first scenario! The cost is having to make two investment decisions instead of one, which isn’t a negligible cost for some. The issue with “this metric is better that that one” is it all depends on the objectives of the investor. Don’t mind making multiple investment decisions in short time frames to maximize IRR? Okay! Want to just put your money somewhere and have it double or triple without having to think about it for a long time at the cost of slightly lower overall returns? Okay! As financial advisors (of sorts) aren’t we here to just understand our investors’ objectives and allocate their capital appropriately?

Interesting post …… thanks for sharing

everyone wants to show projected IRRs until you see that the majority of that return comes from an unrealistic exit price.

Love the question. My vote is multiple. Entrepreneurs count cash. The more of it, the bigger the chunks, the better. Institutions compare notes based on a scorecard like IRR.

Great post! Its not an either/or choice. IRR and equity multiple are just 2 of the 3 investment metrics that help quantify different aspects of the investment. This is also true in endurance sports like cycling or running….you dont consider just watts or heart rate. You need to look at both to best understand what your body is doing and project how it will perform going forward. The more experience you have in the business (or endurance sports) the more the metrics dont “tell” you something. Rather, you already have an expectation of what the IRR and multiple should be from reviewing the deal risks, cashflows and timeline. If the calculated IRR and multiple do not come out to approximately where you expected them to be…that’s when the questions that matter begin. This is similar to what scientists do. Scientists don’t run experiments so they can obtain an answer/outcome. They first have a hypothesis which is then tested through experimentation and if the results compared to the hypothesis dont “jive” then that’s when the questions that matter begin.

Great breakdown. Too often, IRR becomes the headline because it feels impressive and fits neatly into fundraising decks. But the real wealth creators know that MoIC tells the full story. A 2.0x over five years quietly builds more legacy than a flashy 1.5x in two. Appreciate the reminder that higher IRR often = higher risk. Chasing speed can lead to short holds, risky bets, and capital momentum traps. Long-term LPs, family offices, and developers focused on durable wealth care more about how much they make, not just how fast. We need more of this honest conversation in real estate and private equity.