There are a number of terms or expressions used throughout the private equity industry - some of which are included below. Should you require any additional information or would like an explanation for a particular term please contact firstname.lastname@example.org
Carried interest (”carry”) / Fees
Carried interest or simply “carry” represents the share of a private equity fund’s profit (usually 20%) that will accrue to the general partners.
Investors invest directly in a company alongside a limited partnership.
Capital committed by investors. This will be requested or “drawn down” by private equity managers on a deal-by-deal basis. This amount is different from invested funds for two reasons. Firstly, most partnerships will invest only between 80% and 95% of committed funds. Secondly, one has to deduct the annual management fee that is designed to cover the cost of operation of a fund.
Payments to investors after the realisation of investments of the partnership.
Divestments (realisations or exits)
Sale (partial or full) of an investment, usually via a trade sale or an IPO (Initial Public Offering) on a stock market.
Payments to the partnership by investors in order to finance investments. Funds are drawn down from investors on a deal-by-deal basis.
Liquidation of an investment. Among the various methods of exiting an investment are: trade sales, sale of shares in an IPO, write offs, repayment or redemption of preference shares or loans, sale to another venture capitalist or private equity provider or sale to a financial institution.
A company that has previously received venture capital.
Fund of funds
Private equity funds whose principal activity consists of investing in other private equity funds. Investors in funds of funds can thereby increase their level of diversification.
Gearing, debt/equity ratio or leverage
The level of a company’s borrowings as a percentage of shareholder funds.
Growth capital / expansion capital
Capital provided for the growth and expansion of a company that is breaking even or even trading profitably. Funds may be used to finance increased production capacity, market or product development and/or provide additional working capital. Capital provided for turnaround situations is also included in this category.
In the absence of reaching the hurdle return, private equity managers will not receive a share of the profit (carried interest). A hurdle rate of 10% means that the private equity fund needs to achieve a return of at least 10% before the profits are shared according to the carried interest arrangement.
The internal rate of return is a common measure of returns for private equity. The IRR is the annualised implied discount rate (effective compounded rate) which equates the present value of all of the appropriate cash inflows associated with an investment with the present value of all the appropriate cash outflows accruing from it.
Late-stage investment - Management Buy-Out
Management Buy-Out (MBO) are funds provided to enable current operating management and investors to acquire an existing business.
Late-stage investment - Management Buy-In
Management Buy-Ins are funds provided to enable a manager or group of managers from outside the company to buy into the company.
Most private equity firms structure their funds as limited partnerships. Investors are the limited partners and the private equity managers are the general partners.
Net Asset Value.
Public to private
Purchase of the share capital of a company quoted on a stock exchange with the intention of de-listing the company and taking it private.
Sale of an investment.
The secondary market enables institutional investors to sell their stakes in a private equity partnership before it is wound up.
Purchase of existing shares in a company from another private equity firm, or from other shareholders.
Sale of the equity share of an investee company to another company.
A loss making company that can be successfully transformed into a profit maker.
Venture capital - early-stage / seed
Financing provided to allow a business concept to be developed, perhaps involving production of prototypes and additional research, prior to bringing a product to market.
Venture capital - late-stage
Financing provided to companies that have completed the product development stage and require further funds to initiate commercial manufacturing and sales. They will not yet be generating profit.
Venture capital - start-up
Financing provided to companies for the use in 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.