As defined in Rule 501(a) of Regulation D promulgated under the 1933 Act. An “Accredited Investor” includes a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person, immediately prior to the time of purchase in excess of $1 million, or income in excess of $200,000 (or joint income with the investor’s spouse in excess of $300,000) in each of the two preceding years and has a reasonable expectation of reaching the same income level in the current year, and certain legal entities with total assets exceeding $5 million.
Assets under Management:
The total market value of the assets controlled by a fund, including the value of investments as well as uninvested capital.
A previously agreed upon point of reference. In the case of performance, a benchmark would be the index or indices chosen. In the case of a deal, it would be a milestone that the investors evaluate the project and determine whether more funds are warranted.
A document which describes a company’s management, business strategy, and goals. In the context of Private Equity, business plans are usually put together in conjunction with a buyout of a company to ensure proper strategic development of the investment.
Buyouts Investment Strategy:
The acquisition of an existing company using debt and equity financing. Buyouts can span investments in small, mid-sized or large companies.
A notification by the fund manager to the investors for funds. Unlike mutual funds, whereby an investor puts his money into the fund upfront, private equity fund managers ask investors for the money when needed. These funds are used for investments or fees.
Capital Commitment or Total Commitment:
The amount of money that an investor commits to investing in the fund. The commitment will be made at the closing and the capital will be called by the fund as needed during the fund term.
A distribution from the fund. Distributions occur primarily after investment realizations but can also occur after other income events such as interest or dividend payments. Distributions are primarily made in cash, but can be made stock of the underlying investment.
The portion of the fund’s profits paid to the fund manager. Based on a percentage of return, it is usually payable to the fund manager only after certain conditions have been met in regards to the performance of the fund. Carried Interest is sometimes referred to as ‘carry’ or ‘profit share’ or ‘override’.
Clawback or Clawback Option:
A provision in a Limited Partnership Agreement that requires the general partner to return distributed funds to the limited partners at a higher rate to compensate for a profit split that favors the general partner early on. This option provides for the instance where strong performing investments are exited first and weaker performing investments are exited last.
Close (1st, 2nd, 3rd, etc., Final):
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.
A fund that is no longer accepting commitments from investors.
Core-Plus Real Estate Strategy:
Focuses primarily on stable, income producing properties, but also invests in some properties with growth potential. Core-Plus is often the most conservative strategy, distinguished by a lower risk, lower return potential.
Cumulative Internal Rate Of Return:
The weighted average IRR for funds with vintages within a 15 year time span running from 3 to 18 years ago. The cumulative IRR does not include the performance of a fund whose vintage was in the last three years since that fund is likely still investing rather than recouping investment and, therefore, its IRR is not yet relevant.
DPI (Distributions to Paid-In Multiple):
The ratio that is calculated by dividing the amount of the cumulative distributions by the amount of capital that was paid in. DPI is represented by a percentage and gives a private equity investor insight into how much of the fund’s return has actually been “realized”, or paid back to investors. The Distributions to Paid-in Multiple is sometimes known as the realization multiple, since the capital paid out to investors is usually the result of realized gains in the fund. A DPI of greater than one means that a fund has returned its cost.
The amount of cash or other liquid assets available for a fund to deploy, based on capital committed to the fund by investors.
The process of reviewing a fund for investment suitability. This will include analysis of performance, comparison to benchmarks, meeting with fund’s management team, detailed analysis of the funds track record, reference checks, and a report based on the analysis.
The sale of an asset or portfolio company. Exits occur prior to distributions.
An additional investment in a portfolio company which has already received funding. In the case of a venture capital fund, there may be several rounds of follow-on investing.
All the closed funds which a fund manager considers part of the same strategy. For example, a fund manager may have a European Private Equity Opportunity fund that consists of 3 funds with vintages 2004, 2008, 2013 and a US Real Estate Fund with vintages 2005, 2009. Those are two distinct fund families.
The number of years that a fund expects to be in operation. Typically, a private equity fund will operate for 10 years, with the option to extend a few more years if the need arises.
A fund that takes equity positions in other funds. Fund-of-Funds can invest in primary funds or secondary funds. The purpose of these vehicles is to give the investor in the fund-of-funds more opportunity and diversity in private equity investments.
A vehicle for pooling capital with other partners to invest in underlying companies. The fund is managed by a general partner.
The period from when a fund is announced to the time when the final closing occurs. During this period, the general partner will present an investor pitch (“Road Show”) as well as negotiate closing document with prospective investors.
General Partner (GP):
The manager of a Private Equity fund. The GP is given unlimited liability for the debts and obligations of the fund as well as the right to manage the fund.
Gross and Net IRR (Net Internal Rate Of Return):
The performance calculation to the performance of a fund before a GP has paid itself fees. Net IRR is the performance that the investor experiences after all the fees have been paid.
Growth Capital Strategy:
An investment in an established company with good growth characteristics. The company is usually/can be in a growing industry and/or be a growing entity unto itself.
The primary location in which a fund invests. These are categorized by primary economic zones such as North America, Western Europe, Asia, etc.
The rate of return that the fund must achieve before the fund manager can get paid the carried interest.
In Market (number of months):
Refers to the number of months that a fund manager has been raising capital.
A statistical measure of a change in a market or an economy. In the case of a financial market, an index measures the change of an imaginary basket of investments representing all or a portion of that market.
Investment Company Act of 1940:
Created in 1940 through an act of Congress, this piece of legislation clearly defines the responsibilities and limitations placed on fund companies that offer investment products to the public. Responsibilities and limitations such as but not limited to promotion, reporting requirements, pricing of securities for sale to the public and allocation of investments within a fund portfolio.
IPO (Initial Public Offering):
A sale of shares in a formerly privately-held firm on one or more public markets. An IPO is often used by Private Equity funds to exit an investment. Depending on the fund’s preference, the limited partners will either receive stock or cash at the time of exit.
IRR (Internal Rate Of Return):
The performance calculation that is used for private equity investments. The IRR is calculated as an annualized effective compounded rate of return measure and takes the time value of money into account. Although an IRR calculation result is often similar to the Time Weighted Return (“TWR”) used in the public markets, they are two different performance calculations. IRR is the approved calculation for private equity performance by the CFA Institute.
A line graph which illustrates how capital flows into a fund manager in the early years of the fund for use in making investments, nurtures the investments and then produces gains towards the latter years in the funds lifecycle. Plotted over time, the J-curve shows the historical tendency of private equity funds to deliver negative returns in early years as money is invested and investment gains in the outlying years as the portfolios of companies mature.
Key Man Provision:
A legal provision that takes into account the lead managers in a fund and what action will be taken in case one or all of those people are no longer able to manage the partnership. This provision may include key man insurance.
LBO (Leveraged Buyout):
The acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. Often structured in such a way that the target’s cash flows or assets are used as the collateral (or “leverage”). Leveraged buyouts allow companies to make large acquisitions without having to commit a lot of capital.
The use of debt to finance an investment. Debt can allow the investor to take a larger position in a holding without contributing more equity. Leverage may increase the potential scope of both risk and return.
Transaction in which a company borrows a large amount of money and distributes to its shareholders. This usually takes the form of a special dividend.
Limited Partner (LP):
An investor in a private equity fund. The LP makes the commitment to the fund and provides capital as requested. In return, the LP receives distributions (cash or stock), periodic notifications of the fund’s progress, and participates in fund update calls and/or annual meetings.
An agreement between the underwriter of stock and certain stockholders that the holders will refrain from selling their stock for a certain period. This prevents these holders from putting too much of the stock on the market and thereby diluting the stock price.
A periodic payment by investors in a fund to the fund’s manager for investment and portfolio management services. In the investment stage of the fund, the fee is usually based on the capital commitment. As the fund matures, the fee is then based on the assets under management.
Minimum Capital Commitment:
The smallest amount of capital that the fund will allow to be invested.
MOIC (Multiple of Invested Capital):
The ratio that is calculated by dividing the amount of the net asset value of a fund plus the cumulative distributions by the amount of capital that was paid in. The resulting ratio is a used as a performance metric alternative to IRR. Although the MOIC does not take into account the time value of money, it can be used to compare funds that are of similar vintage or funds that are mostly or completely realized.
Opportunistic Real Estate Strategy:
An investment strategy that involving properties that often need a high degree of improvement and generally include investments in development, raw land and niche property sectors. The most aggressive, involving a high-risk, high-return potential strategy.
The amount of money that the fund has called from investors divided by the total amount of commitments to the fund.
PIC (Paid In Capital):
The amount of money that has been called by the fund from investors.
PME (Public Market Equivalent):
A benchmarking calculation that compares an investment in a private equity fund or portfolio to an investment in a public market index, such as the S&P 500 or the Dow Jones Industrial Average. There are different versions of this calculation that have been developed. The goal of each calculation is to show how an investment in a PE fund or a portfolio compares to a similar investment pattern in the public market index. Using a PME calculation, a practitioner can get a more accurate comparison between investing in PE or public securities than by simply comparing the PE portfolio’s IRR to the public index return.
The IRR obtained by taking the cash flows from inception together with the residual value for each fund and aggregating them in a pool of cash flows. This calculation takes into account both the sized and the date of any investment and therefore makes it more accurate than a simple averaging of IRRs (which does not take into account the size of the investments) or the weighted average IRR (Which does not take into account different investment dates).
Investments in private held companies or, in some cases, in public companies outside of an exchange. A private equity firm attempts to invest in a private company, improve the company’s value by improving financial and operational performance, and then exit the investment with a large gain. Occasionally, Private Equity managers will make private investments into public corporations, usually through an off-market transaction.
A breakdown of observed performance into four defined intervals. Top (of “First”) would be the best performers according to that sample. Fourth quartile would be the worst performers.
RVPI (Remaining Value of Paid-in Capital):
The remaining value of a fund divided by paid-in capital. RVPI is a measure of how much of the return is unrealized. As a fund matures, the RVPI will increase to a peak and then decrease as the fund matures and eventually liquidates to a residual market value of zero. At that point, the entire return of the fund has been distributed.
The S&P 500, is also known as the Standard & Poor’s 500. It is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices. Although the S&P 500 is widely used for comparison purposes, there can be significant differences between a private equity fund’s portfolio and the composition of the S&P 500, such that potential investors are cautioned that no such index is directly comparable to a private equity fund.
Secondary Private Equity Market:
An over-the-counter market for Private Equity interests. In this market, limited partners sell both their existing assets and their unfunded commitment in a fund.
Special Situations Strategy:
A broad range of investments including mezzanine, distressed debt, energy or utilities, industry specific, and turnarounds.
Initial funding given to a Venture Capital company in its first few months of existence to help it establish its existence.
A sub category of asset class that more specifically defines what types of investing that fund does within that asset class. The strategy can focus on specific industries, size of investment, size of target companies, etc.
The amount of capital that a fund manager wishes to raise before they stop fundraising, whereby they stop accepting commitments from investors. It is not uncommon for a fund manager to raise a smaller or larger amount than their target size.
TVPI (Total Value to Paid-in-capital):
Value Added Real Estate Strategy:
Characterized by managers buying properties, making improvements and selling at a gain. Improvements can span solving management or operational problems to physical improvements to solving capital constraints. Considered a moderate risk, moderate return strategy.
Venture Capital Strategy:
Early–stage investments in a project or company with the intention of creating an ongoing business entity. At the time of investment, venture backed companies often do not have revenues and/or positive cash flow and may require more capital prior to the company being sold or taken public. These investments involve a substantial element of risk.
Early–stage investments in a project or company in which there is a substantial element of risk.
The legal inception year for a fund, typically the year the fund makes its first investment.
WA IRR (Weighted Average IRR):
A combined IRR calculation of a group of funds based on the paid-in capital of each individual fund. This is as opposed to an average that treats each fund equally, regardless of size.
WA MOIC (Weighted Average MOIC):
Weighted Average MOIC is the Cumulative Distributions across all funds + the Residual Value across all funds/Paid-in Capital across all funds.