Equity Multiple

[Anonymous]

Hello,

I’ve seen the equity multiple modeled as (net cash flows)/(invested equity), regardless of whether any of the cash flows are positive or negative. Obviously this results in a different EM. Which way is correct, or is there a scenario where one makes more sense vs. the other?

Thanks.

[Spencer Burton]

I’ll chime in here for Michael.

I’m glad you brought up the formula for calculating Equity Multiple (EMx) – it’s an important topic. Let me see if I can clear up any confusion you have around the definition of Equity Multiple (i.e. Multiple on Invested Capital or MOIC in traditional private equity), and why we use the Excel logic we do to calculate EMx.

First, Michael and I generally use the same Excel calculation to model EMx; we like the shorter and simpler SUMIF(+)/-SUMIF(-) logic. At first glance, this logic may not look like the EMx definition. So let’s dig into it.

In simple terms, Equity Multiple is the multiple by which invested capital grows over the analysis period. So if $1 USD goes in and $2 USD come out as a result of the $1 invested, the Equity Multiple is 2/1 or 2.00X.

You’ll often see the definition phrased as something like this: (Net Profit + Total Capital Invested) ÷ Total Capital Invested = EMx. But if you look at that phrasing, what it’s really saying is: (Total Distributions – Total Capital Invested + Total Capital Invested) ÷ Total Capital Invested = EMx. And that is overly cumbersome to model.

So for modeling purposes, I prefer to simplify the definition. I think Total Inflows ÷ Total Outflows = EMx, and calculate the metric in the same way.

In terms of the Excel logic. The SUMIF(+)/-SUMIF(-) logic Michael and I use simply sums the Total Inflows and divides that by a positive Total Outflows so that the resulting metric is positive. And the result is identical to modeling (Net Profit + Total Capital Invested) ÷ Total Capital Invested. Feel free to test this assertion out – it’s a healthy exercise that I too did when I was first taught this Excel logic for EMx.

Note that I discuss modeling Equity Multiple in more detail in course 3. I also discuss why I prefer to think of the cash flows in terms of being either inflows or outflows, and how it helps simplify more complex modeling tasks.

Thanks for the great question!

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