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A
Accelerator. An accelerator is a program to help a start-up company grow to be a successful company. Generally, an accelerator will provide the start up with office space, some capital in exchange for equity in the company (or options to purchase equity), and assistance for an established period of time (usually a few months). Accelerators then "graduate" these companies by having a "demo day" where the companies present to potential investors. There are many accelerator programs in the US, but one well-known accelerator is Y Combinatory. Accredited Investor. An "accredited investor" is a person or entity that meets the requirements of Rule 501 of Regulation D of the Securities Act of 1933, as amended. Essentially, an accredited investor is a sophisticated investor that has a certain net worth or meets certain income tests. Many companies restrict private stock offerings to accredited investors. Here's a link to the statutory language (found in §230.501(a)): See also Qualified Client, Qualified Purchaser and Qualified Institutional Buyer. Acquisition. An acquisition is the purchase of fifty percent (50%) or more of a company's outstanding voting stock. An acquisition also occurs when a purchaser purchases substantially all of the assets of a company. An acquisition can either be strategic or financial. In a strategic acquisition, an operating company acquires another company to advance a strategy (expand product/service offerings, expand a customer base, acquire technology or talent, to name a few). In a financial acquisition, a financial buyer (such as a private equity fund) acquires a company in order to improve its performance and later sell the company at a profit. In private equity, a fund will acquire a company using a combination of equity and debt for the purchase price. An acquisition differs from a merger in that a merger is the voluntary combination of two companies to form a new combined entity. See also the definitions for "Asset Purchase Transaction", "Stock Purchase Transaction." and "Add-On Acquisition."
Add-on Acquisition. An "add-on", "tuck-in" or "bolt-on" acquisition is one where a private equity portfolio company (called the "platform company" or "platform") acquires another company to help the platform company grow. Add-ons can help the platform grow its product line, customer base, geography, etc. The private equity firm manages this process.
Advisory Committee. Also known as an "LP Advisory Committee," this is a group of Limited Partners in a fund selected by the General Partner to advise it on matters relating to the fund, most commonly valuations, conflicts of interest, fund term extensions and amendments to the limited partnership agreement. Alpha. Alpha is the amount of return that is due to the active efforts of a manager, as opposed to market forces. In private equity, alpha refers to the returns generated (or the "value added") by the fund manager's skill. Alpha is return due to active management, while Beta relates to the returns from market exposure. Alternative Assets. Alternative assets (or "alternative investments") are those which are not one of the traditional asset classes of cash, public equities and bonds. Alternative assets can include hedge funds, commodities, real estate, derivatives and private equity (venture capital, growth equity, buyouts, distressed debt and mezzanine financing). Alternative assets are generally riskier than traditional assets, but also have the potential to provide greater returns for investors. Alternative Investments. See Alternative Assets. Angel Investor. An "angel investor" is a high-net-worth person who invests directly in start-up companies in exchange for equity in the company. Angel investors usually invest as part of a financing "round" where several angels invest at the same time. Angel investing is very risky and an investor who invests as an "angel" must be able to withstand a total loss on their investment. Of course, a small percentage of these start-up companies become worth incredible amounts of money, reaping huge rewards for these angel investors. Annual Meeting. The annual meeting is an (annual) event where the fund's general partner (GP) presents the fund's performance since the last annual meeting. From an LP's perspective, in-person annual meetings are an invaluable way to get to know the GP better.
Anti-Dilution Protection. Anti-dilution protection is found in convertible preferred stock purchase transactions and is intended to protect investors from future dilution of the value of their holdings in a company. This is accomplished by adjusting the conversion price of the preferred stock so that the investor will obtain more shares of stock when the preferred stock is converted into common stock. The most common version of anti-dilution protection is the weighted-average formula
Antitrust Laws. Most countries have laws ("anti-trust laws') that prohibit or discourage the concentration of a company's market power (monopolies). In the United States, these laws include the Sherman Act, the Clayton Act and the Hart-Scott-Rodino Antitrust Improvements Act ("HSR"). HSR requires the parties of a proposed acquisition that meet certain thresholds to file forms (called "Hart-Scott-Rodino flings") with the Department of Justice and the Federal Trade Commission providing detailed information about the companies and the transaction. The government can then prohibit or challenge a transaction, or allow a transaction to proceed if certain changes are made. Asset Acquisition. See "Asset Purchase Transaction." Asset Allocation. Asset allocation refers to an investor's allocation of its portfolio across different asset classes. For example, an investor may allocate its investment program among public equities, bonds, alternative assets (including private equity) and cash. The allocation is based upon the investor's return expectations, risk profile, liquidity needs, investment time horizon and other factors. Asset-Based Lending. Asset-based lending is a type of lending that is secured by assets of the borrowing company. The security gives the lender priority in claims to other creditors if the company defaults or goes bankrupt. Assets typically used as collateral for asset-backed loans include accounts receivable, inventory or specific equipment. Asset Class. An "asset class" is a group of assets that share common characteristics or behave similarly. Common asset classes include cash, public equities (public stocks), bonds (debt) and alternative assets. However, many investors define asset classes differently. Asset Purchase Transaction. An asset purchase transaction is a type of acquisition where the assets of a company are acquired instead of the outstanding stock. Another common type of acquisition is a stock purchase transaction, where the outstanding stock of a company is acquired. Whether an acquisition is an asset purchase or stock purchase depends on a variety of factors, including liability and tax considerations. Assets Under Management (AUM). Assets under management is the total amount of capital that an asset manager (investment advisor, private equity firm, etc.) has under active management. If a venture capital firm has three $100 million funds, then the venture capital firm has $300 million in AUM. AUM. See Assets Under Management.
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Benchmark. A "benchmark" is a point of reference against which the performance of a private equity fund is measured. The benchmark can be a comparison to the performance of other similar funds or a specific threshold return. Beta. Beta measures a security's sensitivity to movements by the market. A Beta of 1.0 means that the security's price moves in lock-step with the market. A Beta of over 1 means the security's price moves up (down) more than the market moves up (down). A Beta of under 1.0 means that the security's price moves up (down) less than the market moves up (down). Beta is also used in private equity to denote the portion of returns that are due to market factors, while Alpha refers to the returns generated by the active management of the fund manager. Blind Pool. A blind pool is a type of investment fund where the specific investments to be made by the fund are not known at the start of the fund. Private equity funds are blind pools because even though the general strategy is known (lower middle market buyouts in the technology sector in the US) at the time the fund is raised, the particular investments the fund will make aren't known at that time. Managers of blind pools have discretion to make the future investments, so long as the investments are within the stated investment parameters. Blue Sky Laws. "Blue Sky" laws are state securities laws that apply any time there is a purchase, sale or transfer of securities in that state. The state securities laws apply in addition to the federal securities laws. In general, any security (such as stock, warrants, options, convertible notes and SAFEs) must be (1) registered under federal securities laws with the Securities and Exchange Commission unless an exemption from registration is available, and (2) registered (known as "qualified" in state law verbiage) in each state were a sale is made, unless an exemption is available. In private equity, most investments made by private equity funds are exempt transactions under both federal and state securities laws. Board Observer. In venture capital financings, investors often negotiate for the right to designate a person to attend and participate in a company's board meetings.
Bolt-on Acquisition. See Add-on Acquisition. Book runner. In an initial public offering ("IPO"), a group of investment banks form an underwriting group (or syndicate) to manage the process of selling a company's stock to the public (the IPO) for the first time. The "lead underwriter" is the investment bank chosen by the company to lead the IPO process. The other investment banks in the IPO underwriting group are called the co-managers. It is now common for there to be two or more "lead underwriters" on a large IPO. One of these is chosen by the company to manage the order book for the IPO. The book running manager runs the process of collecting all orders for shares in an IPO roadshow and determines with the company the IPO price. Occasionally there will be two book running lead managers, called "co-book-running lead managers." In this case, one investment bank is still chosen to lead the IPO, and the name of this investment bank is placed in the upper-left-most position on the prospectus. This manager is called the "lead left" manager is truly the "lead" investment bank. Bottom-Quartile Returns. See Quartile Returns. Break-Up Fee. When a buyer has entered into an agreement to purchase a company, there is usually a period of time before the transaction closes. This is because certain things must be obtained before the deal can close, such as obtaining regulatory approvals (see "Antitrust Laws" above), financing, or the completion of due diligence. If, during this time, another buyer offers more money to buy the company, the company may terminate the deal with the first buyer. In this case, the buyer is paid a "break-up fee" which is intended to compensate the buyer for its time of evaluating and negotiating the deal and for costs and expenses it has incurred.
Bridge Financing. Bridge financing is money provided to a company by investors on a short-term basis until the company is able to raise its next round of capital. Bridge financings typically convert into the security issued in the next round of financing. Bridge financings are often structured as convertible debt or as Simple Agreements for Future Equity (SAFE). See also "Convertible Note" and "Simple Agreement for Future Equity." Bridge Loan. See Bridge Financing. Burn Rate. See Cash Burn Rate. Buyout. A buyout is a transaction where an investor (typically a private equity fund) acquires control of a mature operating company (which may be public or private) and where a significant portion of the purchase price consists of debt (which is why they are often called "leveraged buyouts").
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Cap Table. See "Capitalization Table." Capital Call. A capital call occurs when a private equity fund manager (also known as the General Partner or GP) notifies the investors (known as Limited Partners or LPs) that the LPs must provide a portion of their capital commitment to the fund. The payment by the LP to the fund (called a capital contribution) is usually due 10 business days after the date of the notice.
Capital Call Line of Credit. See Subscription Line of Credit. Capital Commitment. An investor in a private equity fund commits to investing a certain amount of capital to a fund. This "capital commitment" is not paid to the fund at one time, but is "called" by the fund over time. Capital Gain. Capital gain is the increase in the value of an investment. A capital gain is "unrealized" while the investor holds the investment, and is "realized" when the investor sells the investment. Capital gains are either "short term" (holding period of one year or less) or "long-term" (holding period of more than one year). Capital Overhang. Capital overhang (also known as "dry powder") is the total amount of uncalled capital for all funds in a particular strategy (venture capital or buyouts) or for private equity as a whole. Private equity funds usually call all or most of the uncalled capital over time, as failure to do so means that the investors may be paying management fees (which are based on committed capital) on money that the manager did not put to work. If the capital overhang is high by historical standards, then it could signal that there may be a flood of money that will be invested over the next couple of years, which could lead to inflated prices being paid by funds for deals, which then could lead to lower fund returns. Capital Under Management. See "Assets Under Management." Capitalization Table. A capitalization table, also known as a "Cap Table" is a table (or spreadsheet) that shows the ownership of a company. Cap Tables can be very simple or very complex. Carried Interest. Carried interest, also known as "carry" or "profit participation," is the share in the profits that the general partner receives from the fund. Carried interest is usually 20% of the fund's profits, but in some venture funds the carry can be as high as 30%.
Carry. See "Carried Interest." Cash Burn Rate. A company's "cash burn rate" or "burn rate" is the rate at which the company is spending its cash, usually expressed in months. This is usually relevant for cash-flow negative companies in order to understand how long the company can operate before running out of cash (known as a "runway."). For example, if a company has $5 million of cash in the bank from a Series A financing, and is burning $500,000 per month in cash operating expenses, the company has 10 months of runway before it will need to raise additional capital. Cash Drag. The term "cash drag" describes the negative impact holding cash can have on a private equity fund's performance. Because private equity funds invest over a period of time, funds will keep very low levels of cash on hand, and will call capital from LPs when the fund needs cash for an investment, to pay management fee or fund expenses, and the like Catch-up. See "GP Catch-up." Claw-back. There are two types of claw-backs, a GP claw-back relating to carried interest, and an LP claw-back relating to distributions received by LPs. See "GP Claw-back" and "LP Claw-back." Closing. Generally speaking, a "closing" is the time in a transaction where the documents are signed and all conditions to the transaction have been fulfilled. After a transaction has its closing, the transaction is "closed." In the context of private equity funds, a "closing" refers to the time when investors sign a limited partnership agreement and legally commit to provide capital to the fund. There can be one closing, or a series of closings. When there is a series of closings, the first closing is known as the "initial closing" or "first close" and the final closing is known as the "final closing." Club Deal. A club deal is when a two (or more) private equity firms join together to pursue a deal. The term is mainly used in the context of buyout transactions. Club deals can occur because the lead private equity firm can't finance the transaction alone, and so and so brings in another private equity fund (or funds). Club deals can also occur when private equity firms with unique capabilities (sales and marketing, finance, operations, etc.) join together to use these capabilities to help improve the company's performance after acquisition. Co-Investment. Co-investment, or co-invest, occurs when an LP invests directly into a fund's portfolio company alongside the fund. This is usually accomplished via a special purpose vehicle (SPV) established by the GP of the fund for this purpose, and the GP may charge a reduced management fee and/or carried interest on this SPV. Co-Sale Rights. Co-sale rights, also known as "tag-along" or "take-me-along" rights, are rights obtained in venture capital and other preferred stock financings so that if a stockholder sells all or some of their shares in the company, the holders of the co-sale rights can participate in that sale.
Committed Capital. The committed capital of a fund is the sum of all individual investment commitments made by the limited partners. In private equity, the fund doesn't need the capital all at once, and so the fund "calls" capital over time. An investor's committed capital (also known as "capital commitment") represents the maximum amount that a fund can call from the limited partners.
Common Stock. Common stock is the most basic form of equity ownership in a company.
Convertible Note. A convertible note is a promissory note issued by a start-up company to investors that has a special feature: it automatically converts into the next preferred equity round of financing. The convertible note is often used to "bridge" the company financially to its next equity round. As an inducement to investors, the convertible note may convert at a discount to the valuation of the next financing round, and/or may have a valuation cap. These features mean that the convertible note investors get a better deal on valuation than the next round investors, which makes sense, because their investment in the convertible notes is earlier than the preferred financing round. Another instrument commonly used in early stage financings is a Simple Agreement for Future Equity, also known as a "SAFE." For more on SAFEs, see "Simple Agreement for Future Equity." Convertible Preferred Stock. In venture capital financings, professional investors will obtain convertible preferred stock in exchange for their investment. Convertible preferred stock is convertible into common stock. The conversion may be at the option of the investor ("optional conversion") or may occur automatically ("automatic conversion") upon the occurrence of certain events, such as an IPO
Corporate Carve-Out. A "corporate carve-out" occurs when a company (often a publicly-traded company) sells a part of its business to a buyer. The carve-out can be a sale of a non-core division or subsidiary, or a sale of assets. The buyer can be another company (a strategic buyer) or a financial buyer, such as a private equity fund. Corporate Venture Capital (CVC). Corporate venture capital (also known as "CVC") occurs when an operating company invests in emerging companies. CVCs take may forms - some may be formal programs that are separate entities affiliated with an operating company, while other companies are making opportunistic investments. Intel Capital was an early corporate venture capital program. Crowdfunding. Crowdfunding is the process of raising small individual amounts of money from a large number of people in a relatively short period of time (a few months) to finance a project, a product or a new venture. Crowd funding usually is conducted through a platform on the internet, such as Kickstarter, Go Fund Me or In die go.
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Data Room. A data room is a web-based, secure depository of digital information (such as due diligence materials or periodic financial and/or operating reports) for a private equity fund or private-equity backed company. The term "data room" is a legacy term from the days before the internet when physical rooms were populated with boxes of files containing the information on the fund or company. DCF. See Discounted Cash Flow. Deal Flow. Deal flow refers to the pipeline of investment opportunities available to an investor. For example, in venture capital, deal flow refers to the opportunities a venture capital fund manager has that originate from the team's personal and professional network (referrals), an out-bound calling effort or from attending conferences and other events. See also "Pipeline". Denominator Effect. The "denominator effect" refers to an investor's private equity portfolio value exceeding its target allocation due to the decline in value of other elements in the portfolio. Conversely, the “reverse denominator effect” refers to private equity value falling below its target allocation due to the increase in value of other elements in the portfolio.
Dilution. Dilution occurs when a new financing round is issued by a company, and the existing investors don't participate in the round. By issuing more shares, the existing investors experience a reduction in the percentage ownership they have in the company. If the new financing round is priced below the prior financing round, the existing investors can also experience valuation dilution. Ownership dilution (also known as "equity dilution") can be mitigated by the investors having a right to participate in later financings, known as a Right of First Offer or Pre-Emptive Right (see "Right of First Offer".
Direct Investment. A "direct investment" is an equity investment made directly in an operating company, as opposed to an indirect investment in a company which is an investment made into an investment vehicle (such as a private equity fund) which in turn invests in the company. Direct Secondary. A "direct secondary" is when a stockholder of a private company sells its stock to a third party in a private transaction. See "Secondary." Discounted Cash Flow (DCF). Discounted cash flow, or DCF, is a valuation model that projects a company's cash flows out in the future, and then calculates the present value of these cash flows to determine the value of a company. DCF is commonly used on mature companies with a history of cash flows, but is not generally used to value early stage startups. Distribution (Distributed Capital). A "distribution" is cash and/or stock paid to an investor (limited partner) from a fund. A "cash distribution" is just that, a distribution paid in cash. An "in-kind distribution" is a distribution of securities in a portfolio company, usually stock. Distribution Waterfall. A distribution waterfall refers to the allocation and priority of payments made to the general partner and the limited partners in a private equity fund when a cash distribution is made. Distributed to Paid-in-Capital (DPI). Also known as a "realization multiple," DPI is the ratio of Distributed capital / Paid-in-Capital. This can be stated as Distributions / Paid-in-Capital. Because of the relationship TVPI = DPI + RVPI, DPI can be expressed as DPI = TVPI - RVPI.
Dividends. Dividends are distributions (payments) of assets, usually cash, made by a company to its stockholders. Think of dividends as a return of capital to stockholders. Dividends can only be paid if the company has available assets to pay the dividend; state law will prohibit a company from making a dividend unless the company meets certain tests (such as having retained earnings, being solvent, and/or having sufficient assets in excess of liabilities to pay the dividend). Dividends are usually paid in cash, but in some cases a company might make a dividend of its own stock (a "stock dividend"). Dividends can be mandatory (which is negotiated by investors) or at the discretion of the board of directors (drafted as "when and as declared by the board"). Dividends can be expressed as a dollar amount ($0.13 per share) or as a percentage of the stock price paid by investors (8% dividend). Dividends are usually paid quarterly. For private companies, dividends can be cumulative or non-cumulative; a dividend that isn't paid when scheduled (because it doesn't have retained earnings, etc.) will accrue so that when the company is able to pay dividends, it will pay all of the accrued and unpaid dividends to the stockholders.
Dividend Recapitalization. A "dividend recapitalization" or "dividend recap" is a financial restructuring of a private-equity-backed company, whereby the debt is refinanced (the company takes on additional debt) so that the company can use cash from the debt refinancing to pay a special dividend to its shareholders (primarily private equity funds). This is one way that private equity firms can obtain partial liquidity from an investment. Down Round. A "down round" in a venture capital financing occurs when the price per share for the new round is lower than the price of the prior round. If the new round is a down round, it means that the investors in the prior round will experience value (price) dilution. Downside Protection. In venture capital financings, "downside protection" refers to terms the investors negotiate to reduce the risk of loss ("downside risk") for the investment. This can occur through the combination of a number of terms, including price anti-dilution protection, dividends, liquidation preferences and redemption rights. DPI. See Distributed to Paid-in-Capital. Drag-Along Rights. In venture capital financings, drag-along rights enable preferred stockholder to force other stockholders to go along with the preferred stockholders in a sale of the company.
Drawn-down Capital. See Called Capital. Dry-Closing. Dry-closing, or a "dry close" is when a fund closes on the investor commitments to the fund, so the LPs are contractually bound to provide their capital commitments, but the GP does not make an initial capital call for a period of time. This can occur if the GP starts fundraising for its next fund while it is still investing its current fund, and the fundraising process goes much faster than anticipated. The GP will close on the new fund, but will wait to have a capital call on the new fund until it has completed (or is near completion of) its initial investments in the current fund. Dry Power. See Capital Overhang. Due Diligence. Due diligence is the process of investigating, evaluating and assessing an investment, whether in a fund or directly in a company. The due diligence investigation will cover the people involved (the team), the market opportunity, the business strategy, intellectual property (IP), finances and projections, operations, etc.
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Early-stage. Early-stage can refer to a company, a stage of financing or the strategic focus of a venture capital fund. When a company is "early-stage" it means the company has recently been founded and is developing its initial technology/products/services. An "early-stage financing" refers to a financing in an earl-stage company, and is usually a seed round or a Series A preferred stock round. An "early-stage venture capital firm" is one that specializes in investing in early-stage companies. Earnings Before Interest Taxes Depreciation and Amortization (EBITDA). EBITDA is an approximation of a company's cash flow. EBITDA is a common metric used to value buyout valuations - a multiple of EBITDA is often used to describe the sale price of a company. Note that EBITDA is not the true cash flow of a company, as it does not include items such as changes in working capital or capital expenditures. Free cash flow is the true measure of a company's cash flow. EBITDA. See Earnings Before Interest Taxes Depreciation and Amortization. Elevator Pitch. See Pitch. Enterprise Value (EV). Enterprise value is the total value of a company, which includes equity value as measured by fully-diluted market capitalization plus net debt. A common equation for Enterprise Value (EV) is as follows: EV = fully-diluted market capitalization + minority interest + market value of preferred stock + capital structure debt - cash and equivalents. Note that there are other versions of the formula for Enterprise Value. Equity. Equity is basic ownership in a company, usually in the form of stock (common stock or preferred stock) or in an instrument that converts into equity (stock options, warrants, convertible debt and SAFEs). EV. See Enterprise Value. Exit. An "exit" is the act of realizing (or cashing out, or liquidating) an investment. There are three main ways funds exit a portfolio company investment: (1) the portfolio company is sold and the fund receives cash (or publicly-traded stock) for its stock in the portfolio company; (2) the portfolio company holds its initial public offering (IPO), and the fund sells its stock of the portfolio company in the public market; and (3) the fund sells its investment in a portfolio company to a third party (this is known as a secondary sale). Exit Strategy. An exit strategy is a strategy to exit (or liquidate) an investment, usually resulting from a sale of a company or an initial public offering. Investors in early-stage companies will typically ask the founder of the company what is the exit strategy. Investors in early-stage companies want comfort that the founders are focused on growing the company and selling it or holding an initial public offering (IPO) so that the investors will receive a return.
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Family Office. A family office is an entity established by a wealthy family to manage the assets and investments of the family. Final Return. The "final return" of a fund is the return to LPs after all value has been returned to the LPs and the fund is liquidated. In contrast, an "interim return" is any return calculated before a fund is liquidated and ceases to exist. The calculation of a fund's interim return assumes that the residual value of a fund at the time the return is calculated is a cash flow back to the LP. Financial Acquisition. See Acquisition. Financing Round. A "financing round" occurs when a company raises capital in a structured manner. This typically means that the company is looking to raise a minimum amount of money at an established valuation (a financing round with a negotiated valuation is called a "priced round"). To raise money, the company will approach investors and when they have obtained commitments from investors for the minimum amount they want to raise, a "closing" occurs where the investors sign financing documents (such as a stock purchase agreement) and pay cash to the company and the company issues shares to the investors. Financing rounds are typically for common stock or preferred stock, but can also be for convertible notes or SAFEs. Follow-on Investment. In venture capital, a "follow-on" investment occurs when an investor who has made an initial investment in a company participates in a subsequent round of financing for the company. Follow-on Offering. In the public markets, a "follow-on offering" occurs when a public company sells new shares of stock to the public in a registered offering. A follow-on offering is a type of primary offering. Often existing stockholders holding unregistered stock will participate in the follow-on offering. When existing stockholders participate in the following offering, the follow-on offering has components of a primary offering (shares sold by the company) and a secondary offering (shares sold by the existing stockholders). Venture capitalists and other investors in the company when it was private often participate in these follow-on offerings by exercising their registration rights. See also Registered Offering, Primary Offering, Secondary Offering and Registration Rights. Fund. A "fund" refers to a private equity fund, whether a venture capital fund, growth equity fund, buyout fund, distressed debt fund or mezzanine fund. The fund is a legal entity whereby investors provide capital for the purpose of investment in a portfolio of companies. In the United States, most private equity funds are structured as limited partnerships.
Fund Capitalization. See Committed Capital. Fund-of-Funds. A Fund-of-Funds is an investment vehicle established to invest in a portfolio of funds. For example, a venture capital fund-of-funds will invest in a portfolio of venture capital funds. See my post "LP Corner: Fund Secondary. See Secondary.
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General Partner (GP). The "general partner" of a private equity fund is an entity which manages the fund. See my post "LP Corner: US Private Equity Fund Structure - The Limited Partnership" General Partner Capital Commitment. Also known as "GP Commitment" or "GP Commit," this is the amount of capital a general partner of a fund commits to the fund. The more the GP commits to the fund, the better the alignment of interests with the investors (limited partners) of the fund.
GP. See General Partner. GP Catch-up. A carried interest provision that allows the GP to obtain a greater share of the carried interest until the GP has "caught up" with the LPs in the carry structure. This occurs when there the carried interest has a "hurdle rate" (a preferred return to the LPs) that the GP must achieve before obtaining carry. Once the hurdle rate has been achieved, the GP obtains all of the carry until it is caught up to the carry provisions.
GP Claw-back. GP Claw-back, or GP Clawback, is a provision relating to carried interest that provides if the GP has received too much carry over the life of the fund, the GP must reimburse the fund (the GP's overpaid carry is "clawed back") for this amount, usually net of a tax rate. GP Commitment. See General Partner Capital Commitment. Gross Return. "Gross Return" is a return (whether a multiple or an IRR) that does not deduct any management fee, expenses or carried interest. Gross return is the return a fund obtains from its investments, before deduction of management fee, expenses or carried interest. In contrast, Net Return for a fund is the return that deducts all management fees, fund expenses and carried interest paid to the GP. Net Return is the actual return experienced by the LP.
Growth Equity. Growth equity is an investment in an established, privately-held company to fund its future growth. These are typically minority equity investments in companies with meaningful revenues, and this is often the first institutional investment in the company. The company is also often founder-owned and operated. Firms and funds that invest in these transactions are called growth equity firms/funds.
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Hart-Scott-Rodina Filings. See Antitrust Laws. Harvest phase. The "harvesting phase" is the period of a private equity fund's life where the focus is not on making new investments, but on helping the portfolio companies grow and on exiting the investments. Holding Period. An investor's "holding period" is the length of time the investor holds the investment - that is the amount of time from the original investment to the exit from that investment. Holding period is important for tax purposes - to determine whether gain on an investment is taxed as ordinary income or capital gains tax rates. Hurdle. See Preferred Return.
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Illiquid. When an investment is described as "illiquid", it generally means that there is no readily available market in which to sell the investment. Compare this to a publicly-traded security; it is very easy and fast to buy a publicly-traded stock and it is very easy and fast to sell a publicly-traded stock. Publicly-traded stocks in the United States have been registered with the US Securities and Exchange Commission ("SEC"), and have been approved for public sale. An investment in a private equity fund is generally considered as illiquid, as it can't be sold like a public stock Investments in private equity funds are illiquid for two main reasons: (1) the private equity fund limited partnership interest that the investor acquires is not registered with the SEC, and so there are legal restrictions on transfer; and (2) the investor in a private equity fund signs a "limited partnership agreement" which contains numerous contractual restrictions on the transfer or sale of the investment in the private equity fund. Illiquidity Premium. An illiquidity premium refers to the additional return (or "premium") an investor requires to compensate it for an investment being illiquid. The illiquidity premium is often measured as a basis point (100 basis points, or bps, = 1.00%) premium over a public market index, such as the S&P 500, Russell 2000 or Nasdaq. In Private Equity, the illiquidity premium and the risk premium are often evaluated together to obtain a single required premium over public markets that a private equity investor expects to compensate it for assuming both illiquidity and additional risk. ILPA. See Institutional Limited Partners Association. In-Kind Distribution. See Distribution. Incubator. An incubator is an organization that provides start-up companies with free or low-cost office space, resources, mentoring, and introductions to potential customers, vendors, strategic partners and investors. Information Rights. Information rights are rights negotiated by venture capital funds and other investors in private companies that require the company to provide these investors with quarterly and annual financial reports and other information. Initial Public Offering (IPO). An initial public offering, or IPO, is the first time a company sells its stock to the public. In the US, this is accomplished by a process of the company appointing investment banks to manage the offering, filing a registration statement with the Securities and Exchange Commission, meeting with potential investors in what is known as a road show, listing its shares on a securities exchange such as the New York Stock Exchange or NASDAQ, and pricing the stock being sold to the public.
Institutional Investor. An institutional investor is an entity that makes investments. Types of institutional investors include sovereign wealth funds, public and private pension funds, corporations, insurance companies, foundations and endowments. Institutional Limited Partners Association (ILPA). The ILPA is an organization promoting the interests of limited partners. The ILPA website has considerable resources about the private equity industry.
Interim Return. An "interim return" is any return calculated before a fund is liquidated and ceases to exist. The calculation of a fund's interim return assumes that the residual value of a fund at the time the return is calculated is a cash flow back to the LP. In contrast, the "final return" is the return of a fund after all value has been returned to its LPs and the fund is liquidated. Internal Rate of Return (IRR). As used in Private Equity, IRR is the annualized rate of return from a series of cash flows relating to a fund. IRR can be gross or net. Gross IRR is the return a fund receives on its portfolio investments, and does not take into account (gross of) management fees, carried interest and fund expenses. Net IRR is the return an investor receives from a fund investment (or a portfolio of fund investments), after taking into account (net of) management fees, carried interest and fund expenses. IRRs can also be interim or final. An "interim IRR" assumes that the residual value of a fund is treated as a distribution in order to calculate an IRR. The final IRR can only be calculated when the fund is finally liquidated and all value has been delivered back to the LPs. Investment Bank. An investment bank is a financial organization that advises companies and governments on their fundraising activities. An investment bank will act as a manager of a company's initial public offering (IPO) or follow-on public offering, debt issuances and other complex financial transactions. Investment banks also manage municipalities and governments on bond issuances. Investment banks also advise companies on merger & acquisition opportunities. Investment Period. The term "investment period" when applied to a private equity fund can have two different meanings. First, the investment period is the time during which the fund will make investments in new opportunities. Most venture and buyout funds usually make all initial investments in a 2-3 year time frame, after which it will make follow-on investments and raise their next fund. This investment period is part of the fund's investment strategy. Second, the investment period is sometimes a legal term used in a fund's limited partnership agreement ("LPA") that is defined as a period of time (usually 5 years) starting at the fund's initial closing (and sometimes from the final closing), during which the fund can make its initial investments. So an investment period could be defined in an LPA as "five years starting on the fund's initial closing." This LPA "investment period" is then usually tied to the fund's management fee - the fund will pay the manager a management fee, usually 2% (but sometimes more or less, depending on the strategy and size of fund) of the fund's committed capital during the investment period, which then starts to step down (often by 0.25% (25 bps) each year after the expiration of the investment period. So there is often a disconnect between the investment period in an LPA and the investment period used in practice. Investor Giveback. See LP Claw-back. IPO. See Initial Public Offering. IRR. See Internal Rate of Return.
J
J-Curve. The hypothetical return curve for a venture capital fund. JAMBOG. "JAMBOG" (sometimes "JAMMBOG") is a term Limited Partners use occasionally to describe "Just Another Middle-Market Buyout Group." The term is used in the context that a middle market buyout manager has failed to differentiate itself from the hundreds of other middle market buyout managers in the market raising new funds.
K
Key Man. See Key Person. Key Person. 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. Key Person Clause. A Key Person Clause in a Limited Partnership Agreement provides that if certain events occur involving these key persons (death or departing the firm), then the fund's investment program is halted until a replacement key person is named to the satisfaction of the limited partners.
L
Late Stage Venture Capital. Late stage venture capital are investments made after a venture-backed company has developed its product, proven the a market opportunity, have meaningful revenues and are close to having an exit (liquidity event) such as the sale of the company or an initial public offering. Late stage venture capital investments have less risk than early-stage venture capital investments. LBO. See Buyout. Lead Investor. A company financing round may have multiple investors, especially in venture capital rounds of financing. Typically, one investor will lead the process, establish the valuation and invest the most amount of capital. This is the "lead investor." Letter of Intent (LOI). A letter of intent is a letter that describes the principal terms of a transaction. Letters of intent are common in mergers and acquisitions. Letters of intent are similar to Term Sheets.
Leveraged Buyout (LBO). See Buyout. Limited Partner (LP). A "limited partner" is an investor in a US limited partnership, which is the most common structure for private equity funds. The "general partner" of the limited partnership is the manager of the fund.
Limited Partnership. A limited partnership is the legal structure used to organize a private equity fund. Limited Partnership Agreement (LPA). A limited partnership agreement is the agreement among the limited partners (LPs) and general partner (GP) of a fund, which sets forth the rights and duties of the LPs and the GP, and also sets forth the key terms of the fund, such as management fee, carried interest, fund expenses, fund term, "key-person" clause, "no-fault divorce" clause, etc. Liquidation. Liquidation generally means the ceasing of a company's business activity and the winding down of operations. In venture capital financing agreements, "liquidation" also means the sale of a company. Liquidation Preference. Investors in privately-held companies often invest via preferred stock financings. Preferred stock has rights and privileges that are senior to the holders of common stock. One such right is a liquidation preference, which provides that if the company ceases operations, then after payments to creditors, the holders of the preferred stock receive the remaining cash in the company to the level of their liquidation preference before the common stockholders receive anything. The liquidation preference can be the amount of the preferred stockholders' investment in the company, but can also be a multiple of this. In addition, a liquidation preference can include the sale of a company, which enables the preferred stockholders to receive their liquidation preference back, and if the liquidation preference is a multiple, even more, before the common stockholders receive their proceeds.
Liquidation Waterfall. A liquidation waterfall is the priority and allocation of payments made to preferred stockholders and common stockholders when a company has a liquidation event, such as the sale of the company or the cessation of business activities.
Liquidity Event. A liquidity event is one where an investor realizes (liquidates) its investment. A common liquidity event is the sale of a company for cash. Initial public offerings (IPOs) can also be liquidity events if the investor is able to sell its stock as part of the IPO. See also Exit. Lock-up Period. In an initial public offering (IPO) on US exchanges, it is common for the underwriters (the investment banks leading the deal), to require most of the company's shareholders to wait for a period of time, usually 180 days, after the date of the IPO before they can sell their shares on the public market. This is done to prevent a flood of stock being traded on the market soon after the IPO which could increase stock price volatility and could drive the price down. LOI. See Letter of Intent. LP. See Limited Partner. Note that sometimes "LP" also refers to Limited Partnership. LPA. See Limited Partnership Agreement. LPAC. See Advisory Committee. LP Advisory Committee. See Advisory Committee. LP Claw-back. LP Claw-back (also known as LP Clawback or Investor Giveback), is a provision in an LPA that provides if there is a claim against a fund that the fund does not have enough assets to pay (this usually occurs late in a fund's life), then the GP can require LPs to pay back to the fund any distributions received by the LP to pay the claim.
M
Majority-in-Interest. This is a legal term that is found in limited partnership agreements. It means that number of limited partners representing a majority of the committed capital of the fund. For example, assume a $100 million fund with 10 limited partners: LP-A committed $30 million to the fund (representing 30% of the committed capital); LP-B committed $15 million to the fund (15%), LP-C committed $15 million (15%), LP-D committed $10 million (10%) and the 6 remaining limited partners each committed $5 million (5% each). If LP-A (30%), LP-B (15%) and LP-D (10%) vote on a matter that requires the consent of a majority in interest, these 3 investors represent 55% of the committed capital and are a majority in interest. Management Buyout (MBO). A management buyout is a leveraged buyout where the management team leads the buyout process or is a major force behind the buyout. Management Fee. The management fee is the fee charged by the general partner to the fund for running the day-to-day operation of the fund. The management fee is often 2% of the committed capital of the fund each year during the investment period, ramping down each year thereafter.
Management Fee Offsets. Management fee offsets refers to certain fees paid to the General Partner by their portfolio companies, which reduce the amount of management fee paid to the General Partner by the fund (the management fee are offset by these other fees). This usually occurs in buyout funds. The fees paid to the General Partner may include director fees, monitoring fees, transaction fees, break-up fees, and the like. In most cases, these fees received by the General Partner are offset 100%, but some funds only offset these fees by 50%. Market Capitalization. "Market Capitalization" or "Market Cap" is the market value of a publicly-traded company obtained by multiplying the company's earnings per share by the number of outstanding shares. Note that there are variations of market cap, such as fully-diluted market cap, which includes the impact of outstanding options and warrants. Material. "Material" is a legal term that generally means important, significant or substantial. A "material contract" is one that has a substantial impact on a company's business. In mergers and acquisitions, a deal can be cancelled by the buyer if there's a "material adverse change" to the target's business after the signing of the purchase agreement but prior to the closing. The term "material" is a bit vague, and there's lots of litigation about what the term means. Merger. A merger is the voluntary combination of two companies to form a new entity. See also "Acquisition." Mezzanine Financing. 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 (subordinate) to a company's senior (bank) debt, but senior to all equity. Middle Market Buyouts (aka Mid-Market Buyouts). Middle market buyouts (also known as mid-market buyouts) are those where the target companies are middle market companies. Middle Market Companies. There is not a clear definition for "middle market companies." Some define middle market companies based on revenues or EBITDA, while others define middle market companies based on enterprise value. For example, one might define middle market companies as those having $25 million to under $1 billion in enterprise value. Another might define middle market companies as those with revenues of $25 million to $500 million. Middle market can also be divided into small-cap and upper middle market. Minimum Commitment. The minimum commitment is the minimum amount that may be committed by a Limited Partner (LP) to a fund. This often ranges from $5 million to $10 million minimum commitments for institutional LPs, but may be higher or lower. ." Multiple. A fund's "multiple" generally refers to the fund's Total Value to Paid-in-Capital (TVPI) multiple. See "Total Value to Paid-in-Capital." A multiple may also be quoted on a "gross" basis or a "net" basis. See "Gross Return" and "Net Return."
N
National Venture Capital Association (NVCA). The trade association for venture capital in the US
Net Asset Value. Also known as "NAV," this is calculated as the sum of all of the fund's assets less all liabilities. If the fund is publicly-traded, this amount is divided by the fund's outstanding shares to obtain a NAV per share. Net Debt. Net debt is an element of the equation for Enterprise Value. Net debt is interest-bearing (capital structure) debt less cash and equivalents. Note that there are other definitions of net debt. See also Enterprise Value. Net Return. Net Return for a fund is the return (whether a multiple or an IRR) that deducts all management fees, fund expenses and carried interest paid to the GP. Net Return is the actual return experienced by the LP. In contrast, "Gross Return" is a return that does not deduct any management fee, expenses or carried interest. Gross return is the return a fund receives from its investments, before deduction of management fee, expenses or carried interest.
NVCA. See National Venture Capital Association.
O
Operating Partner. An operating partner of a private equity fund is an individual with executive operating experience (CEO, COO, etc.) and with specific sector expertise, that assists the private equity firm in sourcing and screening opportunities, serving as an executive or board member of the company, or provides advice regarding the companies operations. Organizational Expenses. Organizational expenses are the expenses incurred by the fund in forming the fund and the GP and marketing the fund. These expenses include legal, accounting, printing, travel and other fees and expenses, and can exceed $1 million for large funds. Ownership Dilution. See Dilution.
P
Paid-in-Capital (PI or PIC). Paid-in-capital (also known as 'PI" or "PIC") is the capital that has been contributed by investors (limited partners) to a private equity partnership.
Pari Passu. The term "pari passu" is a term used to indicate that investors, creditors, assets or stocks are treated equally for specific purposes. For example, holders of series A preferred stock and series B preferred stock may be treated on a pari passu (equal) basis when a company declares dividends. Pay-to-Play. A "pay-to-play" provision requires an investor to invest in a dilutive financing round in order to obtain anti-dilution protection.
Payment-in-Kind (PIK). Payment-in-kind, or "PIK," is payment made with stock instead of cash. PIK payments are most often associated with dividend payments, where the company issues shares of the company stock as a dividend in lieu of cash dividends. PIK payments are also found in notes, where the interest is paid by a company in shares in lieu of cash. Piggyback Registration. Piggyback registration refers to a right held by investors who hold unregistered shares of a private company to participate in a registered offering initiated by the company.
PIK. See Payment-in-Kind. Pipeline. In private equity, "pipeline" refers to the deal flow that a private equity fund has. For example, a fund manager will say they have a strong pipeline of deals. See "Deal Flow." Pitch. A "pitch" is the presentation made to persuade an investor to invest in the proposal. One type of pitch is the "elevator pitch" which is a very short verbal presentation, that should take no longer than the time one would have with an investor on an elevator ride. Pivot. A "pivot" is a dramatic change in the company's strategy. Pivots can occur in early-stage companies when a management team realizes that the target market doesn't have the growth potential they thought, the technology doesn't work, the company's initial product or service isn't getting traction in the market, and more. If the company can identify a promising new market, technology, etc., then the company may move, or pivot, to focus on that new opportunity. Placement Agent. A placement agent is an investment bank specializing in helping funds raise capital. Placement agents will help a fund prepare its marketing materials, arrange meetings with institutional investors (LPs) and manage the fundraising process to a close. Placement agents are usually paid a percentage of the funds raised by that placement agent. Platform Company. 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. PME. See Public Market Equivalent. Portfolio Company. A portfolio company is a company in which a private equity fund has made an investment. Post-Money Valuation. See Pre-Money Valuation. Pre-Emptive Right. See Right of First Offer. Pre-Money Valuation. Pre-money valuation (sometimes simply called "pre-money" and sometimes written as "pre-$") is the valuation of a company before giving effect to a financing. Post-money valuation is the valuation of a company after giving effect to a financing. Post-money valuation is the sum of pre-money valuation plus proceeds received by the company from the financing. The formula is: Post-$ = Pre-$ + financing amount.
Preferred Return. A preferred return (also known as a "preferred return hurdle" or a "hurdle rate") is a carried interest provision that provides that the investors in a fund (limited partners or LPs) will receive a certain threshold return before the general partner (GP) is entitled to receive any carried interest. More common in buyout funds than venture funds, the preferred return often provides that the LPs will receive an 8% annual return on their committed capital before the GP can receive any of its carried interest. A preferred return provision is often accompanied with a "catch-up" provision that provides once the preferred return hurdle is met, then the GP receives all of the carry until the GP is brought whole on the carry terms. See "GP Catch-up."
Preferred Stock. In private, early-stage companies, preferred stock is a type of equity security that has greater rights, privileges and preferences than common stock.
Price Dilution. See Dilution. Priced Round. A "priced round" is a financing round where the investors and the company agree to a valuation for the company as part of the financing. Priced rounds typically involve the issuance of common or preferred stock. An alternative to a priced round is raising capital in a financing round where the valuation is not established as part of the round, such as in a convertible note financing or a Simple Agreement for Future Equity (SAFE) financing. See "Financing Round", "Convertible Note" and "Simple Agreement for Future Equity." Primary Offering. A "primary offering" is when a company sells its stock. This is compared to a "secondary offering" which is when stockholders sell their stock. Private Equity. Generally speaking, the term "private equity" means an equity investment in a privately-held company.
Pro Rata. The term "pro rata" means proportionate share. The term "pro rata" is often used in venture capital financings where the investor has the right to participate in a future financing round so they can maintain their ownership interest in the company. For example, let's say you own 20% of a company and have the right to participate in future company financings to maintain your pro rata ownership percentage in the company. When the company raises additional capital, you have the right to participate in that financing round so that you can maintain your 20% ownership stake in the company. Protective Provisions. Protective provisions are found in private company preferred stock financings. These provisions require the company to obtain the consent of the preferred stockholders before the company can take certain actions, such as incur significant debt, pivot the business model, change the number of directors on the board, amend the company's certificate of incorporation, declare or pay dividends, repurchase its stock, and more. Public Market Equivalent (PME). A "Public Market Equivalent" is a methodology to compare the return from a private equity fund to the return from a public market index, using the same or modified cash flows from the fund to invest in the public market index.
Public-to-Private. See Take-Private.
Q
Qualified Client. A "qualified client" is a defined term under the Investment Company Act of 1940. Generally speaking, an investment adviser can only enter into an investment advisory agreement with a client that provides for incentive compensation (including carried interest) to the adviser based on the investment gains if the client is a "qualified client." The standards for a qualified client are more rigorous than those for accredited investors. The definition is found at Section 275.205-3(d)(1) of the US Code of Federal Regulations. Note that the SEC periodically applies an inflation adjustment to the standards, so don't apply these standards without checking if an inflation adjustment has been made. The last adjustment was effective August 16, 2021. The definition is found at Section 275.205-3(d)(1) of the US Code of Federal Regulations. Link: https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.205-3#p-275.205-3(d)(1). Here's the latest SEC release on the thresholds: https://www.sec.gov/rules/other/2021/ia-5756.pdf. See also "Accredited Investor," Qualified Purchaser and Qualified Institutional Buyer. Qualified Institutional Buyer. A Qualified Institutional Buyer, or "QIB", is generally speaking a large sophisticated investor that has at least $100 million in assets under management. QIBs include certain insurance companies, investment companies, pension plans, banks, and banks. The definition is found in Rule 144A(a)(1) of the Securities Act of 1933, as amended. Note that the rule is complicated, so take care when analyzing it. Link to the rule: https://www.ecfr.gov/current/title-17/chapter-II/part-230/section-230.144A#p-230.144A(a). See also "Accredited Investor," "Qualified Client" and "Qualified Purchaser." Qualified Purchaser. Under the Investment Company Act of 1940, certain private funds are considered "investment companies" under the Act and are burdened with significant registration, reporting and other requirements. One exemption from much of this regulatory burden applies if a fund's investors are limited to "Qualified Purchasers" and certain other requirements are met. The requirements to be a "qualified purchaser" are more rigorous than either being an "accredited investor" or a "qualified client." The term "qualified purchaser" is defined by Section 2(a)(51) of the Act
Quartile Returns. Quartile returns identifies the returns of comparable funds (comparable funds are based on strategy, geography and by vintage year), ranks these returns from top to bottom, and groups the returns into four buckets by performance. The top 25% of performing funds are known as "top quartile" or "upper quartile" funds; the next 25% of performing funds are "second quartile" funds, the next quartile are "third quartile" funds and the bottom 25% of performing funds are known as "fourth quartile" or "bottom quartile" funds.
R
Realization Multiple. See" Distributed to Paid-in-Capital." Recapitalization. A "recapitalization" is a restructuring of a company's capital structure (the company's mix of equity and debt). Registrable Securities. The term "registrable securities" refers to shares of stock that are covered by registration rights. Under the US securities laws, whenever a share of stock is sold, it must be registered with the Securities and Exchange Commission (such as in an Initial Public Offering) or sold under an exemption from the registration requirements. In the US, startup and other private companies sell unregistered stock to investors. Because the stock is unregistered, preferred stockholders obtain the right to require the company to register the stock (a "demand registration") or to tag along if the company otherwise registers its stock (a "piggyback registration." The shares of stock covered by these registration rights are called "registrable securities."
Registration. "Registration" is the process a company goes through to be able to sell shares of its stock in the public markets. A company will file a registration statement with the U.S. Securities and Exchange Commission ("SEC") covering shares of its stock, and when the SEC approves the registration, these shares can be sold on a stock exchange such as the New York Stock Exchange or NASDAQ. The first registration a company makes is for its initial public offering, or IPO.
Registration Rights. Registration rights are rights negotiated by venture capital funds and other investors in private financing rounds that give the investors the right to (1) force the company to file a registration statement with the Securities and Exchange Commission (SEC) (called a "demand registration"), or (2) participate in a registered offering initiated by the company (called a "piggyback registration"), so these investors can sell their Registered Offering. A "registered offering" occurs when a company registers shares of its stock with the U.S. Securities and Exchange Commission (SEC) so that these registered shares can be sold in a public sale on a stock exchange, such as the New York Stock Exchange (NYSE) or NASDAQ. The first registration a company makes is for its initial public offering, or IPO. Regulation D. Regulation D is a regulation issued by the Securities and Exchange Commission (SEC) under the Securities Act of 1933, as amended, that provides certain exemptions from the registration requirements of the Securities Act
Representations and Warranties. Representations and warranties (aka "reps and warranties") are factual statements made by a party or parties in an agreement that are relied on by the other party or parties. For example, in a Stock Purchase Agreement where the company sells stock to an investor, the company may represent and warrant to the investor that its financial statements are accurate, that it has paid its taxes, and that there is no litigation pending against the company. There are many additional reps and warranties that the company may make to the investor. The investor may represent and warrant to the company that it is an "accredited investor," that it has experience in investing in these types of companies, and that it understands the risks of investing in privately-held start-up companies. If one or more of the reps and warranties made by a party prove to be false, then the other party or parties may have the right to file a lawsuit or take other action against the party making the false representation and warranty. Reserves. After a private equity fund invests in a company, it will usually "reserve" capital for future investments in that company. For early stage venture capital, a fund can reserve an amount that is equal to its initial investment, so that it can participate to its full pro-rata share of future financings of the Company. For buyout funds, a fund may reserve capital to be used for future acquisitions by the company in which the fund invested. Residual Value (RV). Residual Value is the remaining value of a fund. This is the sum of the value of the fund's investments, cash, other assets, and less any fund liabilities.
Residual Value to Paid-in-Capital (RVPI). RVPI is the ratio of Residual Value to Paid-in-Capital. This can be stated as Residual Value / Paid-in-Capital. Note that because of the relationship TVPI = DPI - RVPI, RVPI can be derived as RVPI = TVPI - DPI.
Return on Investment (ROI). The "return on investment" or "ROI" is the gain or loss on an investment, expressed as a percentage. Reverse Denominator Effect. See Denominator Effect. Right of First Offer (ROFO). A "right of first offer" or ROFO (also known as a "pre-emptive right"), is a right given to an investor to participate in the company's future financing rounds in order enable the investor to maintain its ownership interest in the company.
Right of First Refusal (ROFR). Generally speaking, a right of first refusal (or "ROFR"; pronounced "Roafer") applies when an existing stockholder in a company wants to sell its shares. A ROFR provides the company and/or the other stockholders with a right to buy the selling stockholder's shares on the same terms as the potential buyer has offered to the selling stockholder. ROFRs are the norm for venture capital-backed companies as well as most privately-held companies with many stockholders.
ROFO. See Right of First Offer. ROFR. See Right of First Refusal. ROI. See Return on Investment. Round. See Financing Round. Runway. See Cash Burn Rate. RV. See Residual Value. RVPI. See Residual Value to Paid-in-Capital.
S
SAFE. See Simple Agreement for Future Equity. SEC. See Securities and Exchange Commission. Second Quartile Returns. See Quartile Returns. Secondary/Secondaries. In Private Equity, a "secondary" is a transaction where an investor in a fund or in a company sells its interest in the fund or company to another investor in a private sale. A secondary transaction in a fund is known as a "fund secondary" or an "LP secondary" and a secondary transaction in a company is known as a "direct secondary" or a "secondary direct." A Limited Partner may conduct secondary sales of portions of its portfolio as part of rebalancing its portfolio to match its asset allocation targets.
Secondary Offering. In the public markets, a "secondary offering" is one where stockholders of a public company holding unregistered shares of stock of the company sell these shares in the public markets (via a stock exchange such as the NYSE or NASDAQ) as part of a registered offering. Secondary Direct. See Secondary and Direct Secondary. Secured Debt. Secured debt is debt that is backed by specific assets of a borrower. If the borrower defaults on the loan (from bankruptcy or other reasons), then the lender typically has the right to seize the specific assets securing the loan. Secured debt is senior in priority to unsecured debt in the event of a bankruptcy. Securities Act. The Securities Act of 1933, as amended. The Securities Act is the fundamental law governing issuances and sales of stock and any other securities. Here's a useful link: https://www.sec.gov/answers/about-lawsshtml.html Securities and Exchange Commission (SEC). The Securities and Exchange Commission (also known as the "SEC") is the US government agency that is the watchdog of all securities transactions that fall under the purview of the Securities Act. Link: www.sec.gov Security. A "security" is anything (in legal terms, any "instrument") that is subject to the Securities Act. Almost anything can be a security if the circumstances warrant. There's a famous legal case called Howey that sets out a test for whether something is a security. Under Howey, a security involves (1) an investment of money, (2) in a common enterprise, (3) where there is an expectation of profits from the efforts of the promoter (or a third party). The bottom line is that if someone purchases something (stock, something that converts into stock, many promissory notes, etc. - even an orange grove!) from someone promoting the project, and the investor has the expectation of making money, then that something is a security. Here's a link to the Howey case: https://supreme.justia.com/cases/federal/us/328/293/case.html Seed-stage. "Seed stage" refers to a company in its earliest stages of development. Often a seed-stage company is at the concept stage. "Seed-stage" also refers to investors who invest at this stage in a company's development. Senior Debt. Senior debt has priority over other types of debt, including subordinated debt and unsecured debt. Senior debt is typically secured by all of a company's assets. Series A Financing. Series A financing historically referred to a company's first financing round with institutional venture capital investors. Over the past several years, venture capital investors have been investing in seed-stage companies, so Series A financing more broadly means the first financing round after a company's seed financing. Convertible preferred stock is usually issued in this round of financing, and so this round may also be referred to a "Series A Preferred Stock Financing" or a "Series A Convertible Preferred Stock Financing." Series B, C, D .... Financing. Series B, C, D, etc. financings refer to institutional financing rounds after the Series A round. Securities issued are typically convertible preferred stock. See also Series A Financing. Share Purchase Transaction. See Stock Purchase Transaction. Simple Agreement for Future Equity (SAFE). A simple agreement for future equity, or SAFE, is an instrument used by start-ups to obtain financing from investors in anticipation of a larger financing round in the future. SAFEs are unique in that they are rights to obtain future equity and so are not stock. SAFEs carry no interest payment or repayment terms, and so SAFEs are not debt. To me, it is most similar to a warrant. SAFEs often have special features to induce investors to enter into a SAFE. First, the SAFE may provide that the SAFE converts into the company's next equity round of financing at a discounted valuation, and/or the SAFE may provide a cap on the valuation at which the SAFE converts into the future equity. Both of these features enable the SAFE investors to obtain better pricing than the future round investors. However, unlike a convertible note, if the next round of financing never occurs, the SAFE investor has limited rights to recoup any of its investment. In a convertible note financing, if the future financing never occurs, the convertible note holder has a claim against the company's assets as a creditor. SAFEs are more favorable to companies than convertible notes.
Special Purpose Vehicle. A special purpose vehicle, or "SPV" is a legal entity that is established to facilitate an investment in an underlying company or fund. SPVs are very common vehicles for co-investment. For example, a fund manager may set up an SPV to allow existing investors in its fund to invest directly into a portfolio company alongside the fund through an SPV. The legal form for SPVs is commonly a limited liability company (LLC), but sometimes they are formed as limited partnerships. Spray and Pray. "Spray and pray" is a derogatory term for an investment strategy where very early stage investors (angels, pre-seed and seed-funds) invest a small amount of money in many different companies. The thinking is that early-stage venture capital is a "grand slam" home run business, with one or maybe two grand slam investments providing the returns for a fund. By making a large number of small dollar investments across a wide range of companies, the "spray and pray" strategy hopes that one of the many investments is a grand slam home run. The reason why it's a derogatory term is that because these "spray and pray" investors are investing in so many companies the investors can't really add value to the entrepreneurs and often don't participate in follow-on financing rounds. SPV. See Special Purpose Vehicle. Stock Option. A "stock option" is an incentive or benefit given by a company to employees which provides the employee with a right (but not the obligation) to buy stock of the company at a certain price (the "strike price" for a certain period of time (usually 10 years), and with certain conditions. Stock options are usually subject to "vesting" provisions, which provide that stock options vest (or become unconditional) over a period of time. For example, a stock option grant may provide that 1/60th of the option vests monthly over a period of 60 months. The longer the employee remains with the company, the more options the employee will unconditionally own.
Stock Option Plan. A "stock option plan" is an equity incentive plan adopted by a company to offer its officers, directors, employees and advisors stock options as an incentive for their performance of services to the company. See "stock option."
Stock Purchase Transaction. A stock purchase transaction (also known as a "share purchase transaction") can refer to two different transactions. First is where a company sells some stock to an investor. The second is a type of acquisition where the outstanding stock of a company is acquired instead of acquiring the company's assets alone. Another common type of acquisition is an asset purchase transaction, where the assets of a company are acquired. Whether an acquisition is an asset purchase or stock purchase depends on a variety of factors, including liability and tax considerations. Strategic Acquisition. See Acquisition. Strategic Investor. A "strategic investor" is usually a large, established company that makes an investment in a startup or developing company for strategic purposes, such as to obtain access to the startup's technology, to understand its business model, to develop some kind of joint venture with the company, or to ultimately acquire the company. Strategy Shift. "Strategy shift" occurs when a private equity fund manager strays from the fund's stated strategy. This can occur in a variety of ways, such as investing larger dollar amounts than the stated strategy, investing in a sector or geography that wasn't included in the stated strategy, or over-investing in a sector that was included in a stated strategy. Strategy shift can lead to poor investment results. Strike Price. 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. See also "stock option" and "warrant." Subscription Line of Credit. A subscription line of credit (also known as a capital call facility) is a credit facility provided by banks to private equity firms to manage capital calls. Private equity funds issue capital calls to their investors (limited partners) and the investors usually have 10 days to provide the capital to the fund. However, sometimes the PE fund must act faster than the 10 day period. Subscription lines of credit enable funds to access capital on the same or next day, and so these lines originally afforded PE funds greater flexibility in acting on deals and managing capital calls. Subscription lines of credit are typically not secured by the assets of the fund; rather they are secured by the uncalled capital commitments of high-credit investors in the fund. Many PE funds are using subscription lines of credit more aggressively with the effect of improving fund IRRs, especially early in the life of the fund, which has become a controversial matter.
T
Tail-End Fund. A "tail-end fund" is a private equity fund that is in the later years of the fund's term. Private equity funds typically have a 10-year initial term, plus two or more 1-year extensions at the option of the fund manager, and further extensions with the approval of the investors in the fund. The term "tail-end fund" generally applies to funds that are in years 11 and later in the fund's life. Take-Private. A "take-private" transaction is one where a buyout fund acquires a publicly-traded company and de-lists the company from the stock exchange that trades its shares. This is also known as a "public to private" transaction.
Target. A "target" is a company that another entity (a company or a fund) is seeking to acquire. Term. The number of years in a fund's life. The term is specified in the limited partnership agreement (LPA) and is usually 7 to 10 years for the initial term. The term can usually be extended for 1-2 years at the discretion of the general partner, and after these extension terms are over, the LPs can extend the term of the fund for more years, or the fund can enter into liquidation.
Term Sheet. A term sheet is a document that describes the primary terms of a transaction. Term sheets are commonly used in venture capital transactions, but are also used in other transactions, such as buyouts, mergers & acquisitions and more. Term sheets are similar to Letters of Intent, but term sheets tend to be more of a listing of primary terms while letters of intent are letters that describe the terms. See also Letters of Intent. Top-Quartile Returns. See Quartile Returns. Total Value (TV). Total Value is the total value of a private equity fund, which includes distributions paid to limited partners and the remaining (or "residual") value of the fund. Mathematically, Total Value = Distributions Paid to Investors + Residual Value.
Total Value to Paid-in-Capital (TVPI). TVPI is the ratio of total value of the fund to paid-in-capital. This can be stated as TVPI = Total Value of the Fund / Paid-in-Capital. Note that Total Value = Distributions + Residual Value. This means TVPI can be stated mathematically as TVPI = DPI + RVPI, where DPI is Distributions/Paid-in-Capital and RVPI is Residual Value/Paid in Capital.
Trade Sale. A "trade sale" occurs when a company (such as a portfolio company of a private equity firm) is sold to another operating company which is in the same or a related industry or sector. Compare this to a sale of a company to a financial buyer, such as a private equity firm. Tranche. A "tranche" is a portion of a financing that is subject to the company meeting certain milestones. For example, a Series A financing may fund 1/2 of the financing on closing, and the other half of the Series A financing is funded upon the company meeting certain operational milestones (such as developing a beta version of the software, or achieving a clinical trial outcome, or a revenue run rate). Transaction Fees. Private equity funds (primarily buyout funds) may charge portfolio companies certain fees relating to the initial investment by the fund, or for future acquisitions that the portfolio company makes. Some portion of these fees typically offset the management fees paid to the fund. Tuck-in Acquisition. See Add-on Acquisition. Turnaround. A "turnaround" is the process of making strategic, financial and operational changes to a troubled company in order to reverse its decline and make it profitable. The company may be distressed or it may be in formal bankruptcy proceedings. Many private equity firms specialize in turnaround situations. TVPI. See Total Value to Paid-in-Capital.
U
Underwriter. An "underwriter" is an investment bank and "underwriters" is a group of investment banks that lead a company's efforts to conduct an initial public offering, or IPO. Unicorn. A "unicorn" is a privately-held company that is valued at over $1 billion in their latest venture capital financing round. Unrealized Multiple. See Residual Value to Paid-in-Capital. Unregistered Stock. In the United States, the sale of any shares of a company's stock must be registered with the Securities and Exchange Commission (SEC) unless an exemption from registration is available. Unregistered stock is stock that has been sold by a company under an exemption from registration. The most common exemption from registration is called "Regulation D." See also Registration. Unsecured debt. Unsecured debt is debt that is not secured by collateral owned by the company. Trade debt is an example of unsecured debt. Debt that is secured has priority in payments over unsecured debt in the event of the borrower's bankruptcy. See also Secured Debt. Upper Quartile Returns. See Quartile Returns.
V
Value Dilution. See Dilution. Venture Capital. Venture capital is equity financing provided by investors to private, early-stage companies pursuing new business models, markets, science or technologies, which companies have significant growth prospects and the potential to provide the investors with exceptional long-term returns. Venture capital investing is also very risky, with most investments in early-stage companies returning less than the original investment or returning nothing at all. Vesting. Vesting refers to the schedule that an option becomes an unconditional right of the employee. See Stock Options. Vintage Year. The "vintage year" of a fund is the year that a fund "begins." When this is remains a question of debate. Some define "vintage year" as the year of fund formation, while others define vintage year as the year the fund makes its first investment, and even others define "vintage year" as the year in which the fund makes its first capital call.
W
Warehoused Investments. Often, a fund manager will make one or more investments prior to having an initial closing of its fund, as a way to demonstrate the investment strategy to potential investors. One way this is done is for the principals of the firm to make the investments (either directly or through an entity or entities set up for this purpose), and for these investments to be transferred to the fund upon its initial closing. This is known as “warehousing investments.” Warrant. A "warrant" is a security that gives the holder the right (but not the obligation) to acquire a company's stock at a certain price (the "strike price") for a certain period of time. Warrants are often issued by venture-backed companies in connection with financing rounds (as an incentive to investors), debt transactions and equipment lease transactions.
Waterfall. A "waterfall" as used in finance, generally refers to the priority and allocation of payments among interested parties. See "Distribution Waterfall" and Liquidation Waterfall." Write-Down. A "write down" is when the carrying value is reduced, but not to zero. See "write-off." Write-Off. A "write-off" is when the carrying value of an investment is reduced to zero. For example, if a venture capital fund invests $5 million in an early-stage company, at the time of investment, it will value that investment at $5 million. If in six months, the company goes bankrupt, and the equity holders receive nothing, the venture capital fund will write-off its investment. Write-offs are common occurrences in early-stage venture capital. Write-Up. A "write-up" is when the carrying value of an investment is increased. This usually occurs in private equity when the company has a financing event that establishes a valuation that is higher than the previous valuation, or when the company's financial and operating metrics have improved so that an increase in valuation is warranted, or when the market multiples (such as Enterprise Value to EBITDA) of publicly-traded comparable companies increase.
Z
Zombie. The term "zombie" or "living dead" can be used to describe a company, a private equity fund or a private equity firm. A zombie company is one that received its first venture capital investment long ago, is not growing or is growing very slowly, has barely enough cash flow to keep operating, and has no clear path to liquidity (being sold or going IPO). A zombie fund is a private equity fund that is beyond the original fund term (10-12 years), is long past its investment period and has a few remaining portfolio investments in the fund (often zombie companies) that haven't been able to be exited. A zombie private equity firm is one that has existing funds (likely zombie funds) but has not raised a successor fund in many years (10+ years in my definition).
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