Glossary

A buyout is a transaction financed by a mix of debt and equity, in which a business, a business unit or a company is acquired with the help of a financial investor from the current shareholders (the vendor).

See management buyout (MBO), management buyin (MBI), institutional buyout (IBO), leveraged buyout (LBO).

A share of the profit accruing to an investment fund management company or individual members of the fund management team, as a compensation for their own capital invested and their risk taken. Carried interest (typically up to 20% of the profits of the fund) becomes payable once the limited partners have achieved repayment of their original investment in the fund plus a defined hurdle rate.

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

A debt obligation of a company which is convertible into stock under certain circumstances.

Preferred stock convertible into common stock (ordinary shares).

The number of investment opportunities available to a private equity house.

An instrument securing the indebtedness of a company over its assets.

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. See commitment, contributed capital.

Earnings before interest, taxes, depreciation and amortisation – a financial measurement often used in valuing a company (price paid expressed as a multiple of EBITDA).

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.

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

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

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

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 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

A curve describing the evolution of the earnings of a company poised for rapid growth. This can also be described by the IRR of a private equity fund as it rises from negative to positive. See J-curve.

A return ceiling that a private equity fund management company needs to return to the fund’s investors in additionto the repayment of their initial commitment, before fund managers become entitled to carried interest payments from the fund.

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 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. See hockey stick.

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.

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

A company whose shares are traded on a stock exchange.

A security that has been accepted for trading on an exchange. To become a listed security, the issuer must satisfy the listing requirements of the exchange. Shares that are not listed may be sold over-the-counter (OTC).

The number of shares outstanding multiplied by the market price of the stock. Market capitalisation is a common standard for describing the worth of a public company.

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. Compare high yield bond.

In a public company, the stock which is traded between investors on various exchanges. Owners of ordinary shares are typically entitled to vote on the selection of directors and other important issues. They may also receive dividends on their holdings, but ordinary shares do not guarantee a return on the investment. If a company is liquidated, the owners of bonds and preferred stock are paid before the holders of ordinary shares.

Shares which have preference over ordinary shares, including priority in receipt of dividends and upon liquidation. In some cases these shares also have redemption rights, preferential voting rights, and rights of conversion into ordinary shares. Venture capitalists generally make investments in the form of convertible preference shares. See cumulative preferred stock.

Either (i) the set rate of return that the investors must receive before the general partners can begin sharing in any distributions, or (ii) the level that the fund's net asset value must reach before the general partners can begin sharing in any distributions.

Private equity provides equity capital to enterprises not quoted on a stock market. Private equity can be used to develop new products and technologies (also called venture capital), 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 by using private equity funding. See venture capital, venture capitalist.

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. These are generally private companies whose shares are not quoted on a stock exchange. The fund can take the form of either a company or an unincorporated arrangement such as a Limited Partnership

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.

An investment where a fund buys either, a portfolio of direct investments of an existing private equity fund or limited partner's positions in these funds.

A debt instrument which specifically has a higher priority for repayment than that of general unsecured creditors. Typically used for long-term financing for low-risk companies or for later-stage financing. Compare subordinated debt.

Debt that ranks lower than other loans and will be paid last in case of liquidation. Compare senior debt.

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

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

Loans not secured against a company’s assets.

The policy guidelines a management team uses to value the holdings in the fund’s portfolio. More generally, valuation is an estimate of the price of an item at a given time, based on a model and comparison with the value of similar items.