IRR vs Multiple: Why Permanent Capital Changes Success Metrics

Most real estate investors evaluate deals using two familiar metrics: Internal Rate of Return (IRR) and Equity Multiple. These tools have long been the standard for analyzing performance, but they were built for a deal-by-deal investing world, where success depends heavily on timing asset sales and recycling capital quickly.

As more investors move toward Permanent Capital structures, these traditional metrics start to fall short. Permanent Capital emphasizes compounding, NAV growth, and long-term income stability, a fundamentally different way of building wealth.

This article explains why IRR and Equity Multiple often fail to capture long-term value creation and introduces the success metrics that matter most in a Permanent Capital strategy.

Traditional Metrics: Useful, But Limited

1. Internal Rate of Return (IRR)

IRR measures the annualized return of an investment, discounting future cash flows.
It’s heavily used because it:

• favors deals that return capital quickly

• allows comparisons across different hold periods

• highlights projects with early profits

Where IRR Falls Short

• Highly timing-dependent — small shifts in sale date can drastically change IRR

• Doesn’t distinguish between sources of returns (ongoing cash flow vs. one big exit)

• Rewards short holds, even when selling a strong asset is not optimal

IRR often pushes investors, and sponsors, toward decisions that optimize speed, not value.

2. Equity Multiple

This measures total cash received relative to total cash invested.

• 2.0x means you doubled your money

• Simple and intuitive

Its Limitations

• Ignores time value — a 2.0x in 4 years is very different from a 2.0x in 10

• Doesn’t measure income stability

• Fails to reflect compounding opportunities

Both IRR and Equity Multiple focus on transactions, not portfolio durability.

Why Traditional Metrics Favor Exits, Not Compounding

Deal-by-deal investing is built around the idea that:

• You buy a property

• Improve it

• Sell it

• Raise new capital

• Start over

This cycle prioritizes metrics that look strongest when assets are sold quickly.

But selling strong properties breaks compounding.
In a Permanent Capital model, the goal is not to exit, it’s to own, optimize, and compound.

That requires different metrics entirely.

The Shift Toward Permanent Capital

Permanent Capital redefines success.
Rather than aiming to “finish” a deal, investors aim to:

• build portfolios that grow year after year

• benefit from reinvested cash flows

• tap into appreciation without selling

• preserve assets for legacy and income

This model prioritizes long-term value creation, not short-term liquidity.

For investors, especially those seeking income, estate clarity, or generational wealth, Permanent Capital aligns far better with their goals.

Metrics That Matter in Permanent Capital Strategies

1. Portfolio Yield on Cost

This measures the cash flow produced relative to the original investment.

Example:
A $50M portfolio producing $4M per year = 8% Yield on Cost.

Why it matters:

• Tracks operational efficiency

• Reflects income stability

• Improves over time as rents grow while cost basis stays fixed

Yield on Cost rewards long-term ownership, not quick exits.

2. NAV Growth (Net Asset Value Growth)

NAV Growth measures the increase in portfolio value over time.

Example:
A REIT grows NAV from $500M to $750M in 5 years = 50% NAV growth.

Why it matters:

• Captures appreciation

• Reflects reinvested income

• Shows effectiveness of long-term strategy

NAV Growth is the strongest measure of sustainable wealth creation.

3. Cash Flow Per Unit (or Per Share)

Rather than focusing on one project’s distribution, this measures how much income each investor unit produces across the entire portfolio.

Why it matters:

• Incentivizes stable and rising income

• Demonstrates operational strength

• Aligns with retiree and family office priorities

Permanent Capital portfolios aim for reliable, growing cash flow, not unpredictable deal exits.

4. Total Portfolio Multiple (Over Decades, Not Deals)

This measures the total return across a long-term horizon, cash flow, reinvestments, and unrealized appreciation.

Example:
A $100M portfolio that produces $300M in total value over 20 years = 3.0x Portfolio Multiple.

Why it matters:

• Reflects compounding

• Eliminates timing distortion

• Measures wealth creation across generations

This metric finally captures what Permanent Capital is designed to achieve.

Why Permanent Capital Wins Over Time

Permanent Capital succeeds because it gives investors and operators the freedom to:

• hold strong assets longer

• reinvest cash flows intelligently

• avoid forced sales

• improve assets without rushing

• act strategically during downturns

Compounding becomes the engine of return, not timing the market.

Permanent Capital also offers:

• Stability

  • Income-focused investors gain predictable distributions.

• Flexibility

  • No pressure to sell when markets weaken.

• Alignment

  • Metrics focus on what actually builds long-term wealth.

• Legacy Preservation

  • Families and long-term investors benefit most when assets stay in the portfolio.

Final Thoughts

As the investment world shifts away from transaction-driven strategies and toward long-term ownership and compounding, the metrics used to evaluate success must evolve too.

IRR and Equity Multiple focus on exits.
Permanent Capital focuses on enduring value creation.

Metrics like Yield on Cost, NAV Growth, Cash Flow Per Unit, and Total Portfolio Multiple offer a clearer, more accurate picture of sustainable wealth building.

For investors who want stability, income, and legacy, not just a quick return, Permanent Capital provides a smarter, more resilient path forward.