Buyout

A transaction to purchase a business, a business unit or a whole company.

Capital call

A fund issues a capital call to investors, for them to transfer all or part of the committed capital.

Carried interest

Share of profits a fund manager will receive after returning the capital called and preferred return. It is expressed as a percentage of the fund’s total profits.

Catch-up clause

A hurdle rate clause is often combined with a catch-up clause. Once the hurdle rate is reached, the fund manager will be entitled to any profits made above this rate until the agreed carried interest threshold is hit.

Closed-end fund

Closed-end funds have a pre-defined lifespan and only issue fund shares once. The opposite is an open-end fund.

Closing

The point in time at which the investors sign a limited partnership agreement and enter into a legally binding commitment to provide capital to the fund. If there are several closings, the first will be called the “initial closing” and the last the “final closing".

Co-Investment

Investing directly in a company together with a private equity investment manager.

Collateral

Assets (property or securities) pledged by a borrower to secure payment of a loan or bond issue in the event of default

Committed capital

Capital that investors have "pledged" to provide to a private market funds. In private markets investments are done on a commitment basis. Capital is committed today but only provided to the funds once it is called.

Corporate action

A corporate action is a event initiated by a public company which (may) impact the securities issued by the company. With some corporate actions, the security holder may make an election or take some other action in order to secure their entitlement. Typical examples of corporate actions are dividends, stock splits, rights issues, and spin-offs, mergers and acquisitions.

Counterparty risk

Counterparty risk, also called “counterparty credit risk” or just “credit risk”, is the risk that your counterparty will not be able or willing to meet its contractual obligations. Counterparty risk exists whenever a market participant has entered into a transaction with a counterparty and the latter has a contractual obligation to make payments or deliveries at some point in the future.

Deal flow

Number of potential investments that an investment manager examines within a certain time frame.

Default

The failure by a borrower to comply with certain provisions of their loan agreement (e.g. making interest payments by an agreed deadline).

Distribution

Cash paid out to investors.

Dry powder

Dry powder is uncalled but committed capital in a private market fund.

Due diligence

The detailed review of a company and its financial records, which is done before becoming involved in a business arrangement with that company.

Endowment

An endowment is donated capital that is invested in financial assets to create a reliable annual income stream for a charitable purpose. Most endowments have a clear policy that specifies how the capital can be invested and how the income may be spent. For many universities, endowments are an important source of revenue.

Exchange trading

When trading on an exchange, buyers and sellers of securities do not meet in person, but the transactions are carried out via brokers and traders on an exchange.

General Partner (GP)

A limited partnership is a partnership structure consisting of both, general partners (GP), and limited partners (LP). General partners have unlimited liability and have full management control of the business. Limited partners have little to no involvement in management, but also have liability that's limited to their investment amount in the LP.

Going private

The process of a public company becoming private company again, is referred to as "going private". See also Leveraged buyout.

Growth capital

Growth requires capital, and it must be financed. Growth or mezzanine capital is a later stage private equity investment, aimed at helping successful young companies expand their business and implement their growth plans. Growth capital bridges the financing needs until a company is established enough to be listed on an exchange.

Hurdle rate

The hurdle rate sets a return hurdle, which must be reach before a performance fee is paid to the fund manager. A typical hurdle rate in private equity is 8%.

IPO (Initial public offering)

When a private company sells shares to the public for the first time, the process is called an Initial Public Offering (IPO). In an IPO, ownership of a company changes from private to public. After the IPO, the company's shares are freely traded on the open market, usually through a stock exchange.

IRR (internal rate of return)

The discount rate at which the present value of future cash flows of an investment equals to the cost of the investment. If the net value of the capital outflows (investment costs) and capital inflows (investment income) is zero, the discount factor will equate to the internal rate of return.

Institutional investor

An institution whose purpose is to invest its assets or those held in trust for others (e.g. pension funds, insurance companies).

Investment period

Period during which a fund makes investments.

J-curve

The J-curve represents the evolution over time of the net cumulated cash in- and outflow into a private market fund.

J-curve

The J-curve refers to the negative returns that the fund generates during the investment phase, when the fund manager starts calling capital from investors. The administration fees and costs for launching the fund are covered from the first few capital calls. The return starts turning positive when the assets appreciate in value over time and finally get sold.represents the evolution over time of the net cumulated cash in- and outflow into a private market fund.

Leverage

Leverage refers to the use of debt (borrowed funds) or derivative instruments to amplify returns from an investment. Leverage increases the expected return and the risk of an investment.

Leveraged Buyout (LBO)

A leveraged buyout or LBO is a company’s purchase by another company using a lot of borrowed money to finance the transaction. This borrowed money is provided by private equity or more precisely by leveraged buyout investors. An LBO consolidates all outstanding shares of the acquired company under one ownerships. The acquired company becomes a privately owned company again. The process of a public company becoming private again, is referred to as "going private".

Limited Partner (LP)

A limited partnership (LP) is a partnership structure consisting of both, general partners, and limited partners. General partners have unlimited liability and have full management control of the business. Limited partners have little to no involvement in management, but also have liability that's limited to their investment amount in the LP.

Limited liability company (LLC)

A limited liability company (LLC) is a business structure in the U.S. that protects its owners from personal responsibility for its liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of a partnership rather than an LLC.

Limited partnership

A limited partnership is a partnership structure consisting of both, general partners and limited partners. General partners have unlimited liability and have full management control of the business. Limited partners have little to no involvement in management, but also have liability that's limited to their investment amount in the LP.

Liquidity

Describes the ease with which one can buy or sell a security or asset without causing a pronounced change in the price. The amount that can be traded without a price change indicates how liquid a market is. In accounting, used to describe how quickly an asset can be converted to cash. A liquid market is usually reflected by a narrow bid-ask spread.

Listed

A security or contract (stock, bond, or derivative) that trades on a regulated exchange such as the New York Stock Exchange.

Listing (of securities)

Listing of a securitiy means the inclusion of the security in the list of securities admitted to trading on an exchange.

Mezzanine credit

A subordinated loan, which is accorded a lower priority than a senior loan in the capital structure.

Multiples

Multiples express the return on an investment as a multiple of the paid-in capital. The most commonly used ones are D/PI and TV/PI: ▪ D/PI (distributions to paid-in capital ratio): the sum total of distributions received relative to the capital paid into the fund up to that point. ▪ TV/PI (total value to paid-in capital ratio): the sum of distributions received plus the unrealised value of the investment relative to the capital paid into the fund up to that point.

Net Asset Value (NAV)

The NAV is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. The investments are usually valued at cost in the first twelve months after their purchase, after which their value is set based on a fundamental assessment, comparable transactions and public market multiples.

Open-end fund

Open-end funds are perpetual in nature and can issue or redeem fund shares throughout their existence. The opposite is a closed-end fund.

Portfolio company

A company in which a private equity firm has a stake.

Primaries

Investments in newly launched private markets funds.

Private company

Every company starts as a private company. The shares of a private company are held and traded by a small number of investors. The shares are not listed (traded) on a stock exchange. Private companies have much fewer regulatory requirements to meet than public companies. Private companies do not have to disclose corporate information to the public.

Public company

A public company can sell its shares to the general public ("unlimited" number of investors). The shares of a public company are traded on stock exchanges. A public company must comply with many regulations and reporting standards. Public companies are usually large and established businesses.

Public offer

A public offer is a communication to the public about an offer of securities intended to enable an investor to make a decision to purchase those securities.

Secondaries

Buying a unit in a private markets fund or a participating interest in a company from an existing investor or a general partner.

Shareholder

A person or institution which holds shares in a company, participates in voting and qualifies for a dividend.

Trade Sale

A trade sale is an exit strategy where a portfolio company is sold to another company.

Venture capital (VC)

Venture Capital (VC) typically refers to the funding provided by investors to small or start-up businesses with strong potential for growth. It is an investment in the early development stage of a company typically to finance building up a first market presence. As such venture capital is the riskiest of the four private equity investment types.

Vintage year

The vintage year refers to the year of the first investment or last closing of a private equity fund.