PRIVATE EQUITY GLOSSARY OF TERMS, UNIQUE DEFINITIONS AND EXPLANATIONS
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Secured debt is senior in priority to unsecured debt in the event of a bankruptcy. A key person (formerly known as a “key man”) is an individual or small group of individuals who are partners or senior members of the General Partner and who deemed the most important people managing a fund. A family office is an entity established by a wealthy family to manage the assets and investments of the family. A “direct secondary” is when a stockholder of a private company sells its stock to a third party in a private transaction. Write-up/Write-downAn upward or downward adjustment of the value of an asset for accounting and reporting purposes. These adjustments are estimates and tend to be subjective; although they are usually based on events affecting the investee company or its securities beneficially or detrimentally.
Adjusted Valuation The adjusted valuation within CEPRES is calculated by adding all contributions and subtracting all distributions that occurred in the year after the last available valuation. An expression of the market value of a company relative to a key statistic driving that value. A legal entity set up for a special purpose and to isolate financial risk. Order of repayment in the event of a sale or bankruptcy of the issuer. A line of bank credit predominantly used to fund a target’s working capital needs. Typically, senior secured loans with first priority on payment.
Venture Capital Glossary
Trading of equities, bonds,commodities or derivatives directly between two parties, rather than through an exchange. Markets in Financial Instruments Directive is an EU Directive that came into force on 1 November 2007 across the European Economic Area. It was designed to harmonise financial markets across the EU, and create a consistent approach to their regulation. Bonds where coupon and capital payments are linked to movements in inflation. The distribution of income to unit holders of pooled funds in proportion to the number of units held. Applied to an equity this shows that a dividend has been recently paid and that a purchaser will not receive it.
Transaction costThe cost of trading, such as brokerage, clearing and exchange fees as well as taxes such as stamp duty. Trading suspensionTemporarily halting the trading of a listed security on the stock exchange. Typically, trading suspensions are introduced ahead of important news announcements, following technical glitches, or due to regulatory concerns. RiskThe chance that an investment’s return will be different to what is expected. Risk includes the possibility of losing some or all of the original investment.
LLC – Limited Liability CompanyA company owned by “members” who either manage the business themselves or appoint “managers” top run it for them. Gross Management FeeThe total amount of management fees paid by a Limited Partner, excluding management fee offsets. Discussed in more detail at The Executive Employment Agreement. Free cash flowThe cash flow of a company available to service the capital structure of the firm. Typically measured as operating cash flow less capital expenditures and tax obligations. Earn outA provision which used to be commonplace but is now increasingly rare whereby the buyer of acompany agres to pay the seller a fixed multiple of the actual profits of each of the next two or three years. Distributed to Committed Capital The Ratio of total distributions to Limited Partners to date, to the total committed capital of the fund.
- A momentum investor tries to make gains by buying shares that are going up in value, as they believe the share price will continue to rise.
- Pre-money valuation is often shortened to just “pre”, i.e. “We are raising £500,000 at a £4.5m pre”.
- A measure of the funds a bank has in reserve against the riskier assets it holds that could be vulnerable in the event of a crisis.
- Retail investorWhen used to describe an investor, retail refers to the nature of the distribution channel and the market for the services – selling interests directly to consumers.
- These are the total capital gains/losses made during the period.
- In an initial public offering (“IPO”), a group of investment banks form an underwriting group to manage the process of selling a company’s stock to the public for the first time.
This is an important way in which limited partners can ensure that their interests are aligned with those of the general partner. Department of Treasury has removed the legal requirement of the general partner to contribute at least 1 percent of fund capital. A 1 percent general partner contribution remains standard practice, particularly among venture capital funds. General Partner ClawbackThis is a common term of the private equity agreement.
Underwriters, for example, require lock-up agreements in most IPOs. In such cases, they will usually require the largest shareholders and directors of the company to agree to a lock-up period of six months following the IPO. Lead investor — The firm or individual that organises a round of financing and usually contributes the largest amount of capital to the deal. Due diligence — an investigation of a company aimed at assessing the viability of a potential investment and the accuracy of the information provided by the company. This investigation usually focuses on the legal, financial, tax and commercial position of the company. Down round — a financing round in which the valuation of the company is lower than the value determined by investors in an earlier round. When a portfolio or fund has a lower percentage weighting in an asset class, sector, geographical region or stock than the index or benchmark against which it is measured.
Comparison Between Venture Capital and Private Equity
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A program that provides the mentorship and capital necessary to accelerate the growth and success of young startups. Typically, the program will provide some capital and in exchange will take an equity stake in the startup. A company that has relatively few capital assets compared to its operations. Lending of money where the payback of the loan is guaranteed solely by the assets pledged as collateral for the specific loan. A process of exploiting price differences between two or more assets by simultaneously buying and selling it. Group or individual that buys a large number of public company’s shares in order to try to acquist a number of seats on the company’s board with the aim of making change in the company.
Total Annual Fund Operating Expense
Middle market buyouts (also known as mid-market buyouts) are those where the target companies are middle market companies. A merger is the voluntary combination of two companies to form a new entity. A management buyout is a leveraged buyout where the management team leads the buyout process or is a major force behind the buyout. Williams Act of 1968An amendment of the Securities and Exchange Act of 1934 that regulates tender offers and other takeover related actions such as larger share purchases.
WAULT Weighted Average Unexpired Lease term is a real estate metric that is a measurement of the value of current rent contracts. It is denoted in years and is calculated as the sum of all future rent income currently under contract divided by the annual rent income of a specified year. Weighted Average The weighted average return is a type of average when each return in selected universe is multiplied by a predetermined weight before calculation. In CEPRES, the weight is determined by each deals invested capital. Valuation/Cost Ratio Valuation/Cost Ratio is an indicator of potential remaining upside. It is calculated as ratio of valuation to total invested capital. Risk Free Rate US The rate of return an investor can achieve on a 3-month U.S. The investor incurs essentially minimal risk because of the bill’s stability. This allows investors to evaluate the return of investments given the additional risk.
In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock. Financings and InvestmentsEach transaction involving a private equity fund or funds in a given portfolio company represents one round of financing. Each financing is made up of one or more investments, depending on the presence of co-investors. DividendThe payments designated by the Board of Directors to be distributed pro-rata among the shares outstanding. Dividends can be paid either in cash or in kind, i.e. additional shares of stock.
Bond Funds and Income Funds
The “strike price” is the pre-determined price at which shares of stock of a company may be purchased under a warrant or stock option. A platform company is a company acquired by a private equity firm to serve as the foundation, or platform, for further acquisitions to create a much larger company. Mezzanine financing (also called Mezzanine Debt”) is a form of debt financing that shares many characteristics of equity financing. Typically used in leveraged buyouts, mezzanine debt is junior to a company’s senior debt, but senior to all equity. A letter of intent is a letter that describes the principal terms of a transaction. See Term Sheets for more, and see the post “Annotated Term Sheet” for an example of a term sheet for a venture capital financing.
Is pen an acronym?
PEN originally stood for ‘Poets, Essayists, Novelists’, but now stands for ‘Poets, Playwrights, Editors, Essayists, Novelists’, and includes writers of any form of literature, such as journalists and historians.
The Commission de Surveillance du Secteur Financier in Luxembourg and the Federal Banking Supervisory Office in Germany are the supervisory authorities in these countries analogous to the Swiss Federal Banking Commission. Illiquid assets are those assets that cannot be easily bought, sold or converted into cash. It may often be impossible to convert the asset to cash until the end of the life of the asset. Illiquid funds are those that take time for investors to trade.
Insurance company separate accountA real estate investment vehicle that may only be offered by life insurance companies. This ownership arrangement enables an ERISA-governed fund to avoid the creation of unrelated taxable income for certain types of property investments and investment structures. Performance attribution is the process of analyzing a portfolio’s performance in an attempt to understand which factors drove return. A stage when a certain amount of money is raised by a private equity fund. The close is accompanied by a group of the fund’s limited partners completing their partnership agreement documents. Depending on the fund and its target size, there can be one or several closings before fund raising is completed. The last close is referred to as the final close at which time the final fund size is set.
This enables hedge funds to record positive returns irrespective of the market situation. In the case of fund-linked life insurance, the portion of insurance contributions which are normally invested in the unearned premium reserve is used to acquire fund units. There are life insurance policies which allow the policyholder to choose from a range of funds, as well as policies which allow the policyholder to simply select an investment focus (bonds, equities, real estate, etc.). Metrics used to gauge a company’s performance, https://www.beaxy.com/glossary/eli5/chase to chase wire transfer fee here. It is separate from the coupon, which is the regular interest payment. An incentive fee paid to an asset management company if a portfolio outperforms a stated benchmark.
Employee Stock Option Plan A plan established by a company whereby a certain number of shares are reserved for purchase and issuance to key employees. Such shares usually vest over a certain period of time to serve as an incentive for employees to build long term value for the company. Distributed to Paid in The ratio of money distributed to Limited Partners by the Fund, relative to contributions. Committed CapitalThe total dollar amount of capital pledged to a private equity fund. ClosingAn investment event occurring after the required legal documents are implemented between the investor and a company and after the capital is transferred in exchange for company ownership or debt obligation.
Because this property is part of the business and not deemed to be part of the real estate, it is typically removable upon lease termination. Tenant mixA phrase used to describe the quality of a property’s income stream. In multi-tenanted properties, institutional investors typically prefer a mixture of national credit tenants, regional credit tenants and local non-credit tenants. Shares outstandingThe number of shares of common stock currently outstanding, less the shares held in treasury. Separate accountA relationship where an investment manager or adviser is retained by a single pension plan sponsor to source real estate product under a stated investment policy exclusively for that sponsor. Return on equityThe income available to common stockholders for the trailing 12 months divided by the average common equity, expressed as a percentage.
The process of gathering information about economies, markets and individual investments to support investment decisions. This investment strategy aims to exploit market inefficiencies. Accordingly, simultaneous investments in long and short positions in strongly correlating portfolios are generally entered into. The price-to-book ratio is measured as the market value of equity divided by the book-value of equity (common shareholders’ equity). The relationship between risk and return is a key tenet of modern portfolio theory. In principle, a higher return can only be “purchased” for a higher risk. However, the relationship between risk and return may be optimised via a broad spread of investments . By doing so, a higher return can be generated with the same level of risk, and a lower return can be achieved with a lower level of risk. Percentage change in the value of an investment, plus any accumulated income, and corrected for inflows and outflows of funds during a defined period of time .
The TER included the annual management fee and other charges, for example legal, admin, and audit costs. Following the introduction of KIIDs, TERs have been replaced with OCFs. Selling assets that you have borrowed from a third party, and then buying them back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase. When existing shareholders are given the right to purchase new shares in a company within a given period, in proportion to their existing holding, at a given price . When a portfolio or fund has a greater percentage weighting in an asset class, sector, geographical region or stock than the index or benchmark against which it is measured. The total range of investments from which a fund manager can pick – as defined by a fund’s stated investment objective. An agreement to buy or sell an asset such as a bond or equity, on a specific date in the future at a price agreed today.
Assets that can be easily traded in the market are referred to as ‘liquid’. An asset or investment that is expected to maintain or increase in value relative to the level of inflation over time. The rate at which the prices of goods and services are rising in an economy. The value of all finished goods and services produced by a country, within a specific time period . It is usually expressed as a percentage comparison to a previous time period, and is a broad measure of a country’s overall economic activity. British government bonds sold by the Bank of England, done to finance the British national debt. When money is spent in an economy, the spending results in a multiplied effect on economic output. Fiscal multiplier is the ratio in which the change in income is affected by government spending. Expansionary policies are usually introduced by monetary authorities with the aim to expand money supply and boost economic activity. This is achieved by mainly keeping interest rates low to encourage borrowing by companies, individuals and banks.