Private equity financial modelling is a process that involves analysing financial data to make informed investment decisions. It consists of various key metrics to assess the financial performance of an investment. These metrics are used to evaluate the investment opportunity, analyse the expected returns, and compare different investment opportunities. In this blog, we will discuss some of the key metrics used in private equity financial modelling and their significance.

1. Internal Rate of Return (IRR): The Internal Rate of Return (IRR) is a key metric used to assess the profitability of an investment. It represents the annualised rate of return that the investment is expected to generate over a given period. The higher the IRR, the more profitable the investment is expected to be. The IRR considers the timing and size of cash flows, making it helpful in comparing different investment opportunities.
2. Multiple of Invested Capital (MOIC): The Multiple of Invested Capital (MOIC) measures the total return on an investment relative to the amount of capital invested. For example, if a fund invested $100 million in a company and received $200 million in proceeds, the MOIC would be 2.0x. The MOIC indicates how much return an investor can expect for each dollar invested. It considers the total cash returned to investors over the entire investment period, including any dividends, distributions, or proceeds from the sale of the investment.
3. Cash-on-Cash (CoC) Return: The Cash-on-Cash (CoC) return is a metric used to assess the cash flow generated by an investment relative to the amount of capital invested. It represents the cash distributed to investors as a percentage of the capital invested. The CoC return can help investors and fund managers evaluate an investment's ongoing performance and determine how much cash can be reinvested in new opportunities. The difference between MOIC and CoC is that CoC only considers the cash received during a particular period. In contrast, MOIC considers the total cash received over the entire investment period.
4. Net Present Value (NPV): The Net Present Value (NPV) is a key metric used to evaluate the profitability of an investment by calculating the present value of future cash flows. The NPV considers the time value of money, which means that future cash inflows and outflows are discounted back to their present value. A positive NPV indicates that the investment is expected to generate more cash flows than the cost of the investment.
5. Return on Investment (ROI): The Return on Investment (ROI) is a metric used to assess the efficiency of an investment by measuring the ratio of the investment's gains relative to its cost. The ROI is calculated by dividing the net profit by the investment cost. The ROI provides a simple way to evaluate the performance of an investment and compare it to other investment opportunities.
6. Free cash flow (FCF): Free cash flow (FCF) is a metric used to measure the cash flow available to a company after deducting capital expenditures from its operating cash flow. FCF represents the amount company can use to pay dividends, repay debt, or invest in new projects. FCF is a useful metric for evaluating a company's financial health and its ability to generate cash flow. It can help investors and fund managers to assess a company's ability to fund growth opportunities and generate returns for investors.

In conclusion, private equity financial modelling involves the use of various key metrics to assess the financial performance of an investment. The top 6 metrics used include IRR, MOIC, CoC, NPV, ROI, and FCF. These metrics provide valuable insights into a company's financial health, profitability, risk, and ability to generate returns for investors. Understanding these metrics is critical to making informed investment decisions and evaluating their investment performance over time.

At FAB Analytics, we specialise in building granular monthly Financial Reporting In Excel for corporates, funds, financial consultants, and advisors. Our team is professionally trained in the best practices standards, such as the FAST standard. We provide full-spectrum financial modelling services, from transaction modelling support to running ongoing reporting and analytics for our clients.