Industry Glossary
The definitions in this glossary are sourced from Invest Europe and “Beyond the J Curve: Managing a Portfolio of Venture Capital and Private Equity Funds” by Thomas Meyer and Pierre-Yves Mathonet.
COMMON PRIVATE EQUITY TERMS
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.
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.
An investor in a limited partnership, i.e. a private equity fund. Examples include public pensions and college endowments.
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 share/loans; sale to another venture capitalist; sale to a financial institution.
Measure of profitability that evaluates the performance of an investment. In private equity and venture capital, the most common measures are Internal Rate of Return (IRR), stated in annual percentages, and cash on cash returns, stated in multiples of invested capital.
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 annualized 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.
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.
The IRR that private equity fund managers must return to their investors before they can receive carried interest.
Interest deductibility is the allowance under the current U.S. tax code for a business to deduct its interest expense – the interest a company incurs on its debts – from its taxable income. Current law allows for deductions of up to 30% of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
An acronym that stands for Environmental, Social, and Governance. This term refers generally to responsible investment practices. Private equity managers implement ESG factors in the investment process by ameliorating ESG risks or expanding these opportunities to improve portfolio companies. ESG differs from impact investing, where the main investment goal is increasing social benefits, rather than generating a financial return.
TYPES OF INVESTORS
An investment fund established by a foundation, university or cultural institution providing capital donations for specific needs or to further a company’s operating process.
An entity that provides services to one or more affluent families, including investment management and other services (accounting, tax, financial and legal advice etc.).
A non-profit organization through which private wealth is distributed for the public good. It can either donate funds and support other organizations or provide the sole source of funding for their own charitable activities.
A private equity fund that primarily takes equity positions in other funds.
Country, regional, governmental and European agencies or institutions for innovation and development.
A pension fund that is regulated under private or public sector law. Includes public pension plans and private corporate pensions.
State-owned investment funds investing in foreign direct private equity funds to diversify their portfolio.
INVESTMENT STAGES
Funding provided before the investee company has started mass production/distribution with the aim to complete research, product definition or product design, also including market tests and creating prototypes.
Funding provided to companies once the product or service is fully developed, to start mass production/distribution and to cover initial marketing. Companies may be in the process of being set up or may have been in business for a shorter time, but have not sold their product commercially yet.
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.
Financing provided for an operating company, which may or may not be profitable. Late stage venture tends to be financing into companies already backed by VCs.
A type of private equity investment (often a minority investment) in relatively mature companies that are looking for primary capital to expand and improve operations or enter new markets to accelerate the growth of the business.
Financing provided to acquire a company. It may use a significant amount of borrowed capital to meet the cost of acquisition. Typically, by purchasing majority or controlling stakes.
Financing made available to an existing business, which has experienced financial distress, with a view to re-establishing prosperity.