Private Equity Glossary

The return an asset achieves over time, without comparison to the overall market, other assets or benchmarks.

The obtaining of control, possession or ownership of a company.

The number of securities assigned to an investor, broker, or underwriter in an offering.

Investments covering amongst others private equity and venture capital, hedge funds, real estate, infrastructure, commodities, or collateralised debt obligations (CDOs).

An investor in a private equity/venture capital fund that commits a significant amount of the total fundraising to the fund upfront.

Capital contributed by an independently wealthy private investors.

See business angel.

A fund manager’s allocation of his investment portfolio into various asset classes (eg stocks, bonds, private equity).

A category of investment, which is defined by the main characteristics of risk, liquidity and return.

A process in which an investment bank invites several private equity houses to look at a particular company that is for sale and to offer a bid to buy it.

The arithmetic mean of the internal rates of return (IRRs).

See Internal rate of return (IRR).

Financing made available to a company in the period of transition from being privately owned to being publicly quoted.

Business Angels are high wealth individuals who have themselves often serial experience in start-ups and may contribute with both capital and competence.

A document which describes a company’s management, business concept and goals. It is a vital tool for any company seeking any type of investment funding, but is also of great value in clarifying the underlying position and realities for the management/owners themselves.

Active, organic growth of portfolio companies through add-on acquisitions.

A transaction in which a business, business unit or company is acquired from the current shareholders (the vendor).

This is the total amount of funds available to fund managers for future investments plus the amount of funds already invested (at cost) and not yet divested.

A bonus entitlement accruing to an investment fund’s management company or individual members of the fund management team. Carried interest (typically up to 20% of the profits of the fund) becomes payable once the investors have achieved repayment of their original investment in the fund plus a defined hurdle rate.

A clawback option requires the general partners in an investment fund to return capital to the limited partners to the extent that the general partner has received more than its agreed profit split. A general partner clawback option ensures that, if an investment fund exits from strong performers early in its life and weaker performers are left at the end, the limited partners get back their capital contributions, expenses and any preferred return promised in the partnership agreement.

Fund with a fixed number of shares. These are offered during an initial subscription period. Unlike open-end mutual funds, closed-end funds do not stand ready to issue and redeem shares on a continuous basis.

A closing is reached when a certain amount of money has been committed to a private equity fund. Several intermediary closings can occur before the final closing of a fund is reached.

A deal where several buyout houses pool their resources together when buying a company of significant size, which would be otherwise inaccessible for them alone, either due to the purchase price or fund investment restrictions.

Investor who has contributed a similar share with the lead investor in a private equity joint venture or syndicated deal.

A limited partner’s obligation to provide a certain amount of capital to a private equity fund when the general partner asks for capital.

Contributed capital represents the portion of capital that was initially raised (committed by investors) which has been drawn down in a private equity fund.

There is no single definition of corporate venturing that seems to satisfy all parties, so we distinguish indirect corporate venturing – in which a corporate invests directly in a fund managed by an independent venture capitalist – from a direct corporate venturing program, in which a corporate invests directly by buying a minority stake in a smaller, unquoted company.

Venture capital funds focused on investing in later stage companies in need of expansion capital.

Disclosure in general refers to the communication of information between two different parties. In the private equity and venture capital world, there are two different sides of disclosure. There is on the one hand the disclosure between the general partners and the limited partners, which is governed by the limited partners agreement. On the other hand, there is the disclosure of information by the limited partners on the general partners activities to the public at large.

A client who gives an investment manager total authority to manage his assets.

The amount disbursed to the limited partners in a private equity fund.

See exit

The DPI measures the cumulative distributions returned to investors (Limited Partners) as a proportion of the cumulative paid-in capital. DPI is net of fees and carried interest. This is also often called the “cash-on-cash return”. This is a relative measure of the fund’s “realized” return on investment.

If the venture capitalist sells his shareholding, he can require other shareholders to sell their shares to the same purchaser.

When investors commit themselves to back a private equity fund, all the funding may not be needed at once. Some is used as drawn down later. The amount that is drawn down is defined as contributed capital.

Venture capital funds focused on investing in companies in the early part of their lives.

An arrangement whereby the sellers of a business may receive additional future payments for the business, conditional to the performance of the business following the deal.

An entrepreneur that has experience in creating a business and who would like to work in a venture capital fund using the funds’ network, deal flow and resources to develop new or existing portfolio companies.

Liquidation of holdings by a private equity fund. Among the various methods of exiting an investment are: trade sale; sale by public offering (including IPO); write-offs; repayment of preference shares/loans; sale to another venture capitalist; sale to a financial institution.

The conditions which influence the viability and attractiveness of various exit strategies.

A private equity house or venture capitalist’s plan to end an investment, liquidate holdings and achieve maximum return.

Also called development capital. Financing provided for the growth and expansion of a company, which may or may not break even or trade profitably. Capital may be used to: finance increased production capacity; market or product development; provide additional working capital.

An additional investment in a portfolio company which has already received funding from a private equity firm.

A private equity investment fund is a vehicle for enabling pooled investment by a number of investors in equity and equity-related securities of companies (investee companies). These are generally private companies whose shares are not quoted on any stock exchange. The fund can take the form either of a company or of an unincorporated arrangement such as a limited partnership.See limited partnership.

The age of a fund (in years) from its first drawdown to the time an IRR is calculated.

The total amount of capital committed to a fund by investors

The strategy of specialisation by stage of investment, sector of investment, geographical concentration. This is the opposite of a generalist fund, which does not focus on any specific geographical area, sector or stage of business.

A fund that takes equity positions in other funds. A fund of fund that primarily invests in new funds is a Primary or Primaries fund of funds. One that focuses on investing in existing funds is referred to as a Secondary fund of funds.

The total amount of capital committed by the limited and general partners of a fund.

The process in which venture capitalists themselves raise money to create an investment fund. These funds are raised from private, corporate or institutional investors, who make commitments to the fund which will be invested by the general partner.

A partner in a private equity management company who has unlimited personal liability for the debts and obligations of the limited partnership and the right to participate in its management.

Fund managers typically invest their personal capital right alongside their investors capital, which often works to instil a higher level of confidence in the fund. The limited partners look for a meaningful general partner investment of 1% to 3% of the fund.

Funds with either a stated focus of investing in all stages of private equity investment, or funds with a broad area of investment activity.

A private equity investment in which the venture capitalist contributes only capital – and not business know-how or management involvement – to the investee company.

A private equity investment in which the venture capitalist adds value by contributing capital, management advice and involvement.

The length of time an investment remains in a portfolio. Can also mean the length of time an investment must be held in order to qualify for Capital Gains Tax benefits.

The Horizon IRR allows for an indication of performance trends in the industry. It uses the fund’s net asset value at the beginning of the period as an initial cash outflow and the Residual Value at the end of the period as the terminal cash flow. The IRR is calculated using those values plus any cash actually received into or paid by the fund from or to investors in the defined time period (i.e. horizon).

A rate of return that must be achieved before a manager becomes entitled to carried interest payments from a fund; usually set as an IRR (Internal Rate of Return) but related to the risk free rate of return an investor could obtain in the same country as the fund is investing in.

The starting point at which IRR calculations for a fund are calculated; the vintage year or date of first capital drawdown.

One in which the main source of fundraising is from third parties.

A contractual right to obtain information about a company, including, for example, attending board meetings. Typically granted to venture capitalists investing in privately held companies.

First private equity-backed investment made in an investee company.

An organization such as a bank, investment company, mutual fund, insurance company, pension fund or endowment fund, which professionally invest, substantial assets in international capital markets.

In a private equity fund, the net return earned by investors from the fund’s activity from inception to a stated date. The IRR is calculated as an annualised effective compounded rate of return, using monthly cash flows and annual valuations.

A committee within a private equity/venture capital fund, fund of funds or limited partner that has the final decision on the individual investments made. Members of the committee are either part of the fund or sometimes outside experts.

The stated investment approach or focus of a management team.

The curve generated by plotting the returns generated by a private equity fund against time (from inception to termination). The common practice of paying the management fee and start-up costs out of the first drawdowns does not produce an equivalent book value. As a result, a private equity fund will initially show a negative return. When the first realisations are made, the fund returns start to rise quite steeply. After about three to five years the interim IRR will give a reasonable indication of the definitive IRR. This period is generally shorter for buyout funds than for early stage and expansion funds.

Expansion, replacement capital and buyout stages of investment.

A buyout in which the NewCo’s capital structure incorporates a particularly high level of debt, much of which is normally secured against the company’s assets.

Investor who has contributed the majority share in a private equity/venture capital joint venture or syndicated deal and that has originated and structured the deal, taking over the main responsibility vis-à vis the syndicate.

The arrangements covering: what happens to the profit interest (through carried interest or ownership of shares) of executives who leave an investee company or a venture capital fund; the provision for making a profit-sharing interest available to rising stars (new or young executives who previously did not have such a profit-sharing interest) or new joiners.

A letter from the venture capitalist to the investee company indicating a general willingness or intention to engage in some type of transaction. It often precedes negotiation of a complete agreement, and is typically structured so that it is not legally binding on either party.

All sciences that have to do with living organisms. Main sectors of activity are Biotechnology, Pharmaceuticals and sometimes Nanotechnology.

An investor in a limited partnership (ie private equity fund).

The legal structure used by most venture and private equity funds. The partnership is usually a fixed-life investment vehicle, and consists of a general partner (the management firm, which has unlimited liability) and limited partners (the investors, who have limited liability and are not involved with the day-to-day operations). The general partner receives a management fee and a percentage of the profits. The limited partners receive income, capital gains, and tax benefits. The general partner (management firm) manages the partnership using policy laid down in a Partnership Agreement. The agreement also covers, terms, fees, structures and other items agreed between the limited partners and the general partner.

Agreement between an underwriter and certain stockholders of a company requiring the stockholders to refrain from selling their shares in the public market for a specified lock-up period after a public offering. In the case of a venture capital deal, this prevents the investee company’s executives and the venture capitalist from selling their shares immediately after an IPO. The reasoning behind this restriction is that such a sale would send worrying signals to the market and thus force down the price of shares. Remaining stockholders would then have shares worth far less than their value at IPO.

The period of time for which a lock-up agreement is in operation. Underwriters of IPOs generally insist upon a lock-up period for large shareholders of at least 180 days to avoid a disorderly market. The management, company directors and the venture capitalist are the type of shareholders that are usually subject to a lock-up.

Compensation received by a private equity fund’s management firm. This annual management charge is equal to a certain percentage of investors’ initial commitments to the fund.

A limited partner taking a direct interest in the a general partner, in the formative stage of the fund.

Funds that have been in existence for over two years.

Brochure presented by a general partner in the process of raising funds. This document is dedicated to potential investors (limited partners), and usually contains (amongst other information) a presentation of the management team’s track record, terms and conditions and investment strategies.

Loan finance that is halfway between equity and secured debt, either unsecured or with junior access to security. Typically, some of the return on the instrument is deferred in the form of rolled-up payment-in-kind (PIK) interest and/or an equity kicker. A mezzanine fund is a fund focusing on mezzanine financing.

An open-end fund that may sell as many shares as investors demand. As money flows in, the fund grows. If money flows out of the fund, the number of the fund’s outstanding shares drops. Open-end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund.

A fund which sells as many shares as investors demand.

Private equity funds still available for investment in the industry.

The amount of committed capital an investor has actually transferred to a fund. Also known as the cumulative takedown amount.

A person or entity acting as an agent for a private equity house in raising investment funds.

The IRR obtained by taking cash flows from inception together with the Residual Value for each fund and aggregating them into a pool as if they were a single fund. This is superior to either the average, which can be skewed by large returns on relatively small investments, or the capital weighted IRR which weights each IRR by capital committed. This latter measure would be accurate only if all investments were made at once at the beginning of the funds life.

The portfolio at cost is the sum of all private equity and venture capital investments (held at cost) that have been made until the end of the measurement period and that have not yet been exited.

The valuation made of a company immediately after the most recent round of financing.

The investment stage before a company is at the seed level. Pre-seed investments are mainly linked to universities and to the financing of research projects, with the aim of building a commercial company around it later on.

Rights of existing shareholders to have the first opportunity to purchase shares from a departing shareholder (pre-emption on transfer), or to subscribe for new shares issued by the company (pre-emption on issue).

Private equity provides equity capital to enterprises not quoted on a stock market. Private equity can be used to develop new products and technologies, to expand working capital, to make acquisitions, or to strengthen a company’s balance sheet. It can also resolve ownership and management issues. A succession in family-owned companies, or the buyout and buyin of a business by experienced managers may be achieved using private equity funding. Venture capital is, strictly speaking, a subset of private equity and refers to equity investments made for the launch, early development, or expansion of a business.

The IRR which lies a quarter from the bottom (lower quartile point) or top (upper quartile point) of the table ranking the individual fund IRRs.

Change in a company’s capital structure. For example, a company may want to issue bonds to replace its preferred stock in order to save on taxes. Re-capitalisation can be an alternative exit strategy for venture capitalists and leveraged buyout sponsors.

Repurchase by a company of its securities from an investor. Often required for preferred stock in private equity financing.

Purchase of existing shares in a company from another private equity investment organisation or from another shareholder or shareholders.

The estimated value of the assets of the fund, net of fees and carried interest.

The process during a public offering or fundraising in which the management of the issuing company and the underwriters meet with groups of prospective investors to stimulate interest in the stock to be offered. Roadshows may be arranged in several cities/countries, and are conducted during the waiting period shortly before the registration statement becomes effective.

Stages of financing of a company. A first round of financing is the initial raising of outside capital. Successive rounds may attract different types of investors as companies mature.

The RVPI measures the value of the investors’ (Limited Partner’s) interest held within the fund, relative to the cumulative paid-in capital. RVPI is net of fees and carried interest. This is a measure of the fund’s “unrealized” return on investment.

Financing provided to research, assess and develop an initial concept before a business has reached the start-up phase.

A fund in which, although the main shareholder contributes a large part of the capital, a significant share of the capital is raised from third parties.

The classification of funds by order of investment. First in a sequence is the new fund, defined as the first fund a management group raises together, regardless of the experience level of individual professionals in that group. Next are follow-on funds, defined as subsequent funds (II, III, IV, etc) raised by the same management group.

Agreement further to which one or more purchasers buy shares issued by one or more target companies from one or more sellers. The agreement will set out/forth the type and amount of shares sold, the representations and warranties, the indemnification in the event of misrepresentation and may also include post-closing covenants (such as the obligation for the sellers not to compete with the purchasers).

According to the European Commission definition, “Small and medium-sized enterprises (SMEs) are those businesses which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million”.

Financing provided to companies for product development and initial marketing. Companies may be in the process of being set up or may have been in business for a short time, but have not sold their product commercially.

A group of venture capitalists jointly investing in an investee company.

If another shareholder sells his shareholding, the venture capitalist can insist that his shares are sold on the same terms to the same purchaser.

The plan stated in a private equity fund’s memorandum to provide for the actual transfer of funds from the limited partners to the general partner’s control.

The company that the offeror is considering investing in. In the context of a public-to-private dealthis company will be the listed company that an offeror is considering investing in with the objective of bringing the company back into private ownership.

The financial and management conditions under which private equity limited partnerships are structured.

Comprises funds with an IRR equal to or above the upper quartile point.

A private equity management house’s experience, history and past performance.

The sale of company shares to industrial investors.

The point at which 25% of all returns in a group are greater and 75% are lower.

Professional equity co-invested with the entrepreneur to fund an early-stage (seed and start-up) or expansion venture. Offsetting the high risk the investor takes is the expectation of higher than average return on the investment.

The year of fund formation and first drawdown of capital.

A reduction in the value of an investment.

The write-down of a portfolio company’s value to zero. The value of the investment is eliminated and the return to investors is zero or negative.

An increase in the value of an investment. An upward adjustment of an asset’s value for accounting and reporting purposes.

The rate of return on a debt instrument if the full amount of interest and principal are paid on schedule. Current yield is the interest rate as a percentage of the initial investment.