What impact does a lower entry multiple have on an investment by a private equity firm?

A lower entry multiple positively impacts an investment by a private equity firm as it enhances the internal rate of return (IRR). The entry multiple reflects the valuation of a company at which the private equity firm acquires it. When the entry multiple is lower, the investment is made at a more attractive valuation, allowing for greater potential appreciation in value during the holding period.

As the company grows or improves its operational performance, the exit multiple upon sale is likely to be higher than the initial lower entry multiple. This difference translates into increased returns on investment, especially when calculated in terms of IRR, which measures the profitability of potential investments by factoring in the timing and magnitude of cash flows. A lower entry multiple, therefore, sets a strong foundation for achieving a higher rate of return on the capital invested.