Glossary

Added value
A private equity management team’s exceptional experience, know-how or valuable business contacts which constitute a vital input for the growth of investee companies.
 
Acquisition
The obtaining of control, possession or ownership of a company.

Angel
A wealthy individual who invests in entrepreneurial firms. Although Angels perform many of the same functions as venture capitalists, They invest their own capital rather than that of institutional and Other individual investors.
 
Asset Stripping
Dismantling an acquired business by selling off operational and/or financial assets.

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

Balanced
A venture fund investment strategy that includes investment in Portfolio companies at a variety of stages.

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

Buffer
Unused credit facility or cash reserves.

Burn rate
The rate at which an investee company consumes investment capital.
 
Business plan
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.

Buyback
A corporation’s repurchase of its own stock or bonds.

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

Buyout Fund
Funds whose strategy is to acquire other businesses; this may also include mezzanine debt funds which provide (generally subordinated) debt to facilitate financing buyouts, frequently alongside a right to some of the equity upside.
 
Capital Asset Pricing Model (CAPM)
Capital Asset Pricing Model determines the cost of equity of a quoted company. This cost depends on the risk free interest rate, the return of a market index and the security’s volatility, compared to the overall market. 

Capital gains
If an asset is sold at a higher price than that at which it was bought, there is a capital gain.

Capital under management
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.

Capital weighted average IRR
The average IRR weighted by fund size.

Captive fund
A fund in which the main shareholder of the management company contributes most of the capital, ie where parent organisation allocates money to a captive fund from its own internal sources and reinvests realised capital gains into the fund.

Carried interest
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.
 
Company buy-back
A redemption of private or restricted holdings by the portfolio company itself.
 
Contributed 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.

Conversion
The act of exchanging one form of security or common stock equivalent for another equivalent security of the same company (eg preferred stock for common stock, debt securities for equity).

Conversion ratio
The number of underlying securities that can be acquired on exchange of a convertible security.

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

Convertible preferred stock
Preferred stock convertible into common stock (ordinary shares).

Convertible security
A financial security (usually preferred stock or bonds) that is exchangeable for another type of security (usually ordinary shares) at a fixed price. The convertible feature is designed to enhance marketability of preferred stock as an additional incentive to investors.

Convertible/equity related loan
Loan convertible into equity as per pre-agreed terms.

Corporate venturing
Venture capital provided by large corporations to further their own strategic interests.

Debt financing
Financing by selling bonds, notes or other debt instruments.

Debt ratio
Debt capital divided by total capital.

Debt service
Cash required in a given period to pay interest and matured principal on outstanding debt.

Debt/equity ratio
A measure of a company’s leverage, calculated by dividing long-term debt by ordinary shareholders’ equity.

Development capital
See expansion capital.

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

Dilution
Dilution occurs when an investor’s percentage in a company is reduced by the issue of new securities. It may also refer to the effect on earnings per share and book value per share if convertible securities are converted or stock options are exercised.

Direct public offering
A public offering in which shares are sold directly to investors, rather than through an underwriter.

Disbursement
Investment by funds from private equity funds into portfolio companies.

Disclosure letter
A document disclosing matters which might otherwise amount to a breach of warranties. Matters so disclosed limit the effectiveness of the warranties.

Discounted cash flow (DCF)
A method of assessing the value of an investment based on predicted cash flows discounted to take account of the fact that a euro tomorrow is worth less than a euro today.

Distribution
The amount disbursed to the limited partners in a private equity fund.
 
Early stage
Seed and start-up stages of a business.

Early Stage Fund
Venture capital funds focused on investing in companies in the early part of their lives.
 
Equity
Ownership interest in a company, represented by the shares issued to investors.

Equity kicker
In a mezzanine loan, equity warrants payable on exit.
 
Exit
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.

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

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

Expansion capital
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.
 
Fund
The investment vehicle, often a limited partnership, to which the Investors commit capital.

Fund focus (investment stage)
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.

Fund of funds
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.

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

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

Horizon internal rate of return
An indication of performance trends within an industry sector. Horizon IRR uses the beginning net asset values as an initial cash outflow and net asset values at the period end as the terminal cash flow. Through these values plus/minus any net interim cash flows, it calculates IRRs for the defined time period.

Horizon IRR
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).

Inception
The starting point at which IRR calculations for a fund are calculated; the vintage year or date of first capital drawdown.
 
Initial investment
First venture-backed investment made in an investee company.
 
Institutional buyout (IBO)
Outside financial investors (eg private equity houses) buy the business from the vendor. The existing management may be involved from the start and purchase a small stake. Alternatively, the investor may install its own management.

Institutional investor
An investor, such as an investment company, mutual fund, insurance company, pension fund, or endowment fund, which generally has substantial assets and experience in investments. In many countries, institutional investors are not protected as fully by securities laws because it is assumed that they are more knowledgeable and better able to protect themselves.

Intellectual property
Patents, copyrights, trademarks, trade secrets and similar rights in ideas, concepts, etc.

Interest cover
One indicator used by banks to calculate debt ceiling. It consists of EBIT divided by net interest expenses. This ratio is a measure of the company’s ability to service its debt.

Internal rate of return (IRR)
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.
 
IPO (Initial Public Offering)
The sale or distribution of a company’s shares to the public for the first time. An IPO of the investee company’s shares is one the ways in which a private equity fund can exit from an investment.

IRR Internal Rate of Return
The IRR is the interim net return earned by investors (Limited Partners), from the fund from inception to a stated date. The IRR is calculated as an annualised effective compounded rate of return using monthly cash flows to and from investors, together with the Residual Value as a terminal cash flow to investors. The IRR is therefore net, i.e. after deduction of all fees and carried interest. In cases of captive or semi-captive investment vehicles without fees or carried interest, the IRR is adjusted to created a synthetic net return using assumed fees and carried interest.

Later stage
Expansion, replacement capital and buyout stages of investment.
 
LBO (leveraged buyout)
A buyout in which the New Co’s capital structure incorporates a particularly high level of debt, much of which is normally secured against the company’s assets.

Lead investor
Investor who has contributed the majority share in a private equity joint venture or syndicated deal.
 
Limited partner
An investor in a limited partnership (ie private equity fund).
Compare general partner.

Limited partnership
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.
 
Management buy in (MBI)
A buyout in which external managers take over the company. Financing is provided to enable a manager or group of managers from outside the target company to buy into the company with the support of private equity investors.

Management buy out (MBO)
A buyout in which the target’s management team acquires an existing product line or business from the vendor with the support of private equity investors.

Management fee
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.

Mature funds
Funds that have been in existence for over two years.

Mezzanine finance
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.
 
P/E ratio
Price/earnings ratio – the market price of a company’s ordinary share divided by earnings per share for the most recent year.
 
Private equity
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 buying 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.
 
Quartile
Segment of a sample representing a sequential quartes (2,5%) of the group. (First 5 out of 20 funds)
 
Realisation ratio
The ratio of cumulative distributions to paid-in capital.

Recapitalisation
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.
 
Rescue (or turnaround)
Financing made available to an existing business which has experienced trading difficulties, with a view to re-establishing prosperity.

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

Retail investor
A non-institutional investor who purchases securities for his own account.

Roadshow
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. Road shows may be arranged in several cities/countries, and are conducted during the waiting period shortly before the registration statement becomes effective.

Rounds
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.

RVPI - Residual Value to Paid-In
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.
 
Second Stage
Working capital for the initial expansion of a company.

Secondary Buyout
Exit mechanism whereby one investment firm sell its position in a venture on to another investment firm.

Secondary market
A market or exchange in which securities are bought and sold following their initial sale. Investors in the primary market, by contrast, purchase shares directly from the issuer.

Secondary sale
The sale of private or restricted holdings in a portfolio company to other investors.

Secured debt
Loans secured against a company’s assets.

Secured obligation
A debt obligation which is secured by the pledge of assets.
 
Seed stage
Financing provided to research, assess and develop an initial concept before a business has reached the start-up phase.
 
Standard deviation
A statistical parameter: measures how much elements in a data set vary around the mean.

Start-up
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. 

Takedown schedule
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.

Term Sheet
A short document summarising the principal financial and other terms of a proposed investment. It is usually non-binding, but may impose some legal obligations on the investor and the company.

Terms and conditions
The financial and management conditions under which funds are structured.

Third Stage
Funds provided for the major expansion of a company whose sales volume is increasing and which is breaking even or profitable.

Trade sale
The sale of company shares to industrial investors.

Turnaround
Financing provided to a company at a time of operational or financial difficulty with the intention of improving the company performance.
 
Valuation methods
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.

Venture capital
Professional monies co-invested with the entrepreneur to fund an early stage (seed start-up) or expansion venture. Offsetting the high risk the investor takes is the promise of high return on the investment.

Vintage
The year of fund formation and first takedown of capital.
 
Warranty
Statements, usually contained in a share subscription or purchase agreement, as to the existing condition of the company which, if not true, support a legal action for compensation by way of money damages.
 
Write-down
A reduction in the value of an investment.

Write-off
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.

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

Yield
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.