Equit IRR and Dividend IRR in Infra Deal
Please someone explains the difference between two. Espeicially for Infra PE. FCFE is always equal to the dividend (cumulatively)?
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Usually in infra deals (and other deals as well), your return derives from two different components, which are: 1) appreciation of the equity 2) dividends/SHL repayments distributed from the PortCo during the ownership.
Dividend IRR in your case probably means average cash yield during the ownership i.e., what is the annualised dividend yield.
Very simple example:
Equity investment: $100
Dividend/year during the holding period: $10
Holding period: 5yrs
--> (10+10+10+10+10)/5/100 = annualised dividend yield 10%
So let's say the PortCo has not performed as planned, so the equity value at exit is the same as at entry (100) --> total equity IRR from the investment is the same as your dividend yield i.e., 10%.
If the equity value ar exit is 120, your equity IRR will increase to 13% (dividends + equity appreciation).
So to sum it up, equity IRR is the total return from the investment (includes dividends + equity appreciation), and dividend IRR probably means the average cash yield during ownership.
Hope this helps!
In addition: debt repayments lead to equity returns at exit (because debt is lower at exit), but are not included in dividend IRR. Dividend IRR is also referred to as cash return.
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