IRR to Equity?
I recently came across something that was asking for IRR to Equity. Basic logic tells me this would be IRR divided by equity invested but is that right? It seems strange to have a percentage divided by a generally large number. What would be the purpose of seeing that? If I am completely off on the calculation then how would you calculate it?
Was likely asking for IRR on the Free Cash Flow, aka the Cash Flow to Equity, aka Levered Cash Flow.
Probably this - or could have been shorthand for equity partner. Have worked with sponsors (GPs) who just refer to their LP investors as "equity." So the metric would be IRR on just the LP's CFs (levered CF's less the GP split). Would need more context to be sure of what was asked.
IRR to equity is your levered return, or cash flow to equity investors.
So cash on cash?
No, Cash on cash only accounts for cash flow in year one. You want the discount rate at which NPV=0 when only looking at the cash flow to equity investors.
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