Glossary

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Add-on: An investment strategy where a private equity firm acquires a smaller company to complement and enhance the value of an existing portfolio company. The add-on acquisition is typically made to achieve synergies, expand market share, enter new markets, or enhance the capabilities of the portfolio company. By integrating the add-on company, the private equity firm aims to create additional value and improve the overall performance of the combined entity. This strategy is also known as a "bolt-on" acquisition.

Asset Allocation: The process of dividing investments among different regions, countries, asset classes, or other investment sectors in order to diversify risk and meet investment objectives.

Assets Under Management (AUM): The total market value of the investments that an entity manages on behalf of clients.

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Basis Points (bps): A unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equal to one hundredth of a percent (0.01%). For example, if an interest rate increases from 2.00% to 2.25%, it has risen by 25 basis points.

Benchmark: A standard or point of reference against which the performance of an investment or fund can be measured. Benchmarks are often market indexes, such as the S&P 500, which represent a specific segment of the market. Investors use benchmarks to compare how well their investments are performing relative to the overall market or a specific sector.

Buyout: A strategy focused on acquisition of a controlling interest in a company. If the stake is bought by the firm's management, it is known as a management buyout and if high levels of debt are used to fund the buyout, it is called a leveraged buyout. This often results in the company being taken private, meaning its shares are no longer publicly traded, with a goal of making the company more profitable.

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Capital Call: A request made by a private equity fund to its investors to provide a portion of the money they have committed. This is used to fund investments or cover expenses. Investors agree to these calls when they first commit to the fund.

Carried Interest/Incentive Fee/Performance Fee: The share of the private equity fund’s profits that the fund manager is due once the fund has returned the outside investors’ capital plus a defined hurdle rate. Carried interest is often also called an “incentive fee” or “performance fee.”

Closed-End Fund: A type of fund that raises a fixed amount of capital through commitments from investors during a defined fundraising period. Once the capital is raised and the fund is closed, no additional investments can be accepted. This structure provides the fund managers with a stable pool of capital to deploy over the investment period.

Closing Date: The date on which a private equity fund formally closes its fundraising process and starts its investment activities. This can refer to both the "first close," where the fund has secured initial commitments and can begin making investments, and the "final close," where the fundraising period ends and no new commitments are accepted. The closing date is a key milestone in the lifecycle of a private equity fund, marking the transition from raising capital to deploying it.Closing date can also refer to the date a client commits to a fund.

Co-Investment: Investments made alongside a private equity fund by limited partners (LPs) or other investors. In a co-investment, the investor participates directly in a specific deal or portfolio company, rather than through the broader fund. This allows investors to increase their exposure to particular investments they find attractive, often with lower fees compared to investing through the fund. Co-investments are typically offered by the general partners (GPs) to their LPs as a way to share larger deals and provide additional investment opportunities.

Committed Capital: The total amount of money that investors have pledged to invest in a private equity fund. This capital is not all provided upfront; instead, it is drawn down over time through capital calls as the fund identifies and makes investments.

Contribution Pace: The rate at which investors provide their committed capital to a private equity fund. This is typically determined by the fund's capital calls and can vary depending on the investment opportunities and needs of the fund. A faster contribution pace means investors are providing capital more quickly, while a slower pace means capital is drawn down over a longer period.

Cost Basis: The original value or purchase price of an investment, including any associated costs such as commissions and fees. The cost basis is used to calculate capital gains or losses when the investment is sold. For example, if you buy a stock for $100 and sell it later for $150, your cost basis is $100, and your capital gain is $50.

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Deal Flow: The rate at which investment opportunities are presented to investment firms.

Distribution Pace: The rate at which a private equity fund returns capital and profits to its investors. This can include proceeds from the sale of portfolio companies, dividends, or other forms of income. A faster distribution pace means investors receive returns more quickly, while a slower pace means returns are spread out over a longer period.

Diversification: An investment strategy that involves owning investments across various financial instruments, asset classes, industries, and other categories to reduce risk. The idea is that a diversified portfolio will, on average, yield higher returns and pose lower risk than any individual investment within the portfolio and reduce the effects of volatility.

DPI (Distributions to Paid-In Capital): A performance metric used in private equity to measure the amount of capital that has been returned to investors relative to the capital they have invested. It is calculated by dividing the cumulative distributions (cash or stock returned to investors) by the paid-in capital (the total capital that has been drawn down from investors). DPI provides insight into the realized returns of an investment or fund, excluding any unrealized gains.

Drawdown Rate: The speed at which a private equity fund calls committed capital from its investors to make investments or cover expenses. It indicates how quickly the fund is deploying the capital it has raised. A higher drawdown rate means the fund is using the committed capital more quickly, while a lower rate suggests a slower pace of capital deployment.

Dry Powder: The amount of committed but unallocated capital that a private equity fund has available for investment. It represents the funds that have been raised from investors but have not yet been invested in portfolio companies.

Due Diligence (DD): The comprehensive process of investigating and evaluating a potential investment opportunity. This involves reviewing financial statements, operations, legal matters, market conditions, and other relevant aspects to assess the risks and benefits. Due diligence is essential to ensure that investors make informed decisions and that there are no hidden issues that could impact the investment's performance.

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EBITDA: (Earnings Before Interest, Taxes, and Amortization): A financial metric that measures a company's profitability by excluding interest expenses, income tax expenses, and amortization. It provides a clearer picture of the company's operational performance by focusing on earnings generated from core business activities. EBITA is often used to compare companies within the same industry, as it removes the effects of financing and accounting decisions.

Evergreen Fund: An open-ended fund with no set termination date that can continuously accept new investors and capital. Investors can also redeem capital at regular intervals, subject to manager approval, assuming certain parameters are met.

Exit: The process by which a private equity firm or investor sells its stake in a portfolio company to realize the investment's return. Some ways for a private market position to exit a portfolio include management buyout, initial public offering (IPO), sale to strategic buyer or sale to financial buyer.

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Final Close: The last opportunity for investors to commit capital to a private equity fund. After the final close, no new investors can join, and the fund begins its full investment phase. The final close marks the end of the fundraising period and the start of the fund's investment operations.

First Close: The initial milestone in a private equity fund's fundraising process when the fund secures its first batch of commitments from investors. After the first close, the fund can start making investments while continuing to raise additional capital until the final close. The first close is important because it demonstrates investor confidence and can help attract more investors to the fund.

Private Equity Fund: A type of investment fund that pools capital from institutional and accredited investors to invest in private companies. These funds are typically managed by a team of professionals known as general partners (GPs), while the investors are referred to as limited partners (LPs).

Fund of Funds: An investment strategy of holding a portfolio of other investment funds rather than investing directly in a singular buyout fund. The purpose of a Fund of Funds is to achieve diversification and risk management by spreading investments across multiple underlying funds.

Fundraising: The process by which a private equity firm solicits commitments of capital from investors to form a new fund. The goal of fundraising is to gather enough committed capital to reach the fund's target size, enabling the firm to start making investments. Fundraising typically includes multiple rounds, culminating in a first close and eventually a final close.

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General Partner (GP): The entity or individuals responsible for managing a private equity fund. General partners make investment decisions, manage the fund's assets, and oversee the operations of the portfolio companies. They are also responsible for raising capital, conducting due diligence, and ultimately realizing returns for the investors. In return for their management services, general partners receive management fees and a share of the profits, known as carried interest.

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Internal Rate of Return (IRR): The annualised implied discount rate calculated from a series of investment flows. It is the return that equates to the present value of all invested capital in an investment to the present value of all returns, or the discount rate that will provide a net present value of all cash flows equal to zero. IRRs are most accurately calculated based on daily investment flows and a residual value. The residual value used in all IRR calculations in this report is measured using the Net Asset Value of the assets underlying the respective investment flow stream at the beginning or end of any respective period being measured.

Invested Capital: The total amount of money that has been deployed by a private equity fund into its portfolio companies. This includes all the capital that has been drawn down from the fund's committed capital and used to make investments, whether for acquiring companies, funding growth, or other strategic purposes. This metric helps assess how much of the fund's available capital has been actively put to work in generating returns for investors.

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J-Curve: A graphical representation of the typical performance trajectory of a private equity fund over time. It shows that funds often experience negative returns in the early years due to initial investment costs, fees, and the time required for portfolio companies to mature and generate returns. As the investments start to perform and generate profits, the fund's returns typically increase, resulting in a curve that resembles the letter "J." The J-Curve effect underscores the importance of patience and long-term perspective in private equity investing.

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Limited Partner (LP): An investor in a private equity fund who contributes capital but does not participate in the day-to-day management or decision-making of the fund. Their liability is limited to the amount of capital they have committed to the fund, meaning they are not personally liable for the fund's debts or obligations beyond their investment. In return, they receive a share of the profits generated by the fund's investments.

Liquidity: The ease with which an asset or investment can be quickly converted into cash without significantly affecting its value. High liquidity means that an asset can be sold rapidly at a price close to its market value, while low liquidity indicates that it may take longer to sell the asset and that it might need to be sold at a discount. In the context of private equity, investments are typically considered illiquid because they are not easily sold or traded on public markets and often have long holding periods before an exit can be achieved.

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Mid-Life Co-Investment: An investment made alongside a private equity fund during the middle phase of its lifecycle, rather than at the initial investment stage. Mid-life co-investments occur after the fund has already made its initial investments and the portfolio companies are more mature and have a track record of performance. These co-investments allow investors to participate in specific deals with potentially lower risk, as the companies have already progressed beyond their early stages and may offer clearer visibility on growth prospects and exit opportunities.

Multiple On Invested Capital (MOIC): A performance metric used to measure the total return on an investment relative to the amount of capital invested. It is calculated by dividing the total value received from the investment (including any realized gains and remaining equity value) by the initial invested capital. MOIC provides a simple way to assess the overall profitability of an investment. For example, if an investor puts $1 million into a company and eventually receives $3 million in total returns, the MOIC would be 3.0, indicating that the investor has tripled their money.

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Net Asset Value (NAV): The total value of a fund's assets minus its liabilities. It represents the per-share value of the fund and is often used to determine the price at which investors can buy or sell shares in the fund. For private equity funds, NAV is an important metric for assessing the current value of the investments held in the portfolio.

Net Performance: The measure of an investment's return after all fees, expenses, and costs have been deducted. For private equity funds, net performance provides a clearer picture of what investors actually earn, as it accounts for management fees, carried interest, and other expenses that can impact the overall returns. Net performance is typically expressed as a percentage and is used to assess the effectiveness and profitability of an investment or fund from the investor's perspective.

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Open-End Fund: A type of investment fund that does not have a fixed number of shares. Instead, the fund continuously issues and redeems shares based on investor demand. Investors can buy shares directly from the fund at the fund's current Net Asset Value (NAV) per share, and they can sell shares back to the fund at the NAV. This structure allows for more liquidity compared to closed-end funds, as investors can enter and exit the fund more easily.

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Paid In Capital: The total amount of capital that investors have actually contributed to a private equity fund. This is the portion of the committed capital that has been called and received by the fund from its investors. Paid-in capital is used to make investments, cover expenses, and support the operations of the fund. It is a key metric for assessing how much of the investors' committed capital has been put to work. In private equity, paid-in capital is often referred to as "drawn-down capital" or "called capital."

Partnership Expenses: The costs and expenses incurred by a private equity fund in the course of its operations, which are typically shared among the fund's limited partners (LPs) and general partners (GPs). These expenses can include management fees, administrative costs, legal and accounting fees, due diligence costs, travel expenses, and other operational costs.

Portfolio Company: A company in which a private equity fund has invested. These companies are part of the fund's investment portfolio and are managed and monitored by the fund's general partners to enhance their value and achieve profitable exits. The goal is to improve the performance and growth of these companies through strategic, operational, and financial support, ultimately generating returns for the fund's investors. Or investee company. The company or entity into which a private equity fund invests directly.

Preferred Return/Hurdle Rate: The minimum annual rate of return that a private equity fund must achieve before the general partners (GPs) can receive carried interest or performance fees. This rate ensures that limited partners (LPs) receive a certain level of return on their invested capital before any profit-sharing with the GPs occurs. The preferred return is typically expressed as a percentage and serves as a benchmark for the fund's performance. The preferred return, also commonly referred to as the “hurdle rate,” is an annual return that limited partners are entitled to receive prior to the general partner receiving carried interest. In practice, it is a way to ensure limited partners make a profit before the GP earns their carried interest.

Primary Fund: A private equity fund that invests directly in companies by purchasing equity or debt securities. This is the traditional form of private equity investment, where the fund's capital is used to acquire stakes in companies, which are then managed and developed to create value.

Private Equity (PE): A form of investment that involves buying shares or ownership stakes in private companies (companies that are not publicly traded) or taking public companies private. The goal is to improve the company's value through various strategies, such as restructuring, expanding operations, or improving management. Private equity investments are typically made by private equity firms, which pool capital from institutional investors and high-net-worth individuals. The investments are generally long-term and aim to generate high returns through eventual exits, such as sales or public offerings.

Private Markets: Financial markets where investments are made in assets not traded on public exchanges. These include private equity, venture capital, private debt, real estate, and infrastructure. Investments in private markets typically involve direct transactions between investors and issuers, such as private companies, and are characterized by less liquidity and longer investment horizons compared to public markets. The debt and equity components of private markets are individually referred to as Private Debt and Private Equity.

Primary Investment: An investment into a private equity fund at the beginning of its lifecycle. The primary investment generally locks up the investors’ capital for around 10 years as the fund manager puts it to work in the market. If a primary investor wishes to exit their position in the fund before maturity they will need to sell to a new investor, also known as a secondary investor.

Private Placement Memorandum (PPM): A legal document provided to potential investors when a private equity fund or company is seeking to raise capital through a private placement. The PPM outlines the terms and conditions of the investment, including the investment strategy, risks, financial statements, management team, fee structure, and legal considerations. It serves as an essential tool for investors to perform due diligence and make informed decisions about whether to invest in the fund or company.

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Real Assets: Physical or tangible assets that have intrinsic value due to their substance and properties. Examples of real assets include real estate, infrastructure, natural resources (such as oil, gas, and minerals), and commodities (like gold and agricultural products).

Return On Investment (ROI): A financial metric used to evaluate the profitability of an investment. It is calculated by dividing the net profit from the investment by the initial cost of the investment and is usually expressed as a percentage. ROI helps investors compare the efficiency of different investments and determine which ones are generating the best returns relative to their cost.

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Secondary Investment: The purchase of existing stakes or interests in private equity funds or private companies from current investors, rather than investing directly in a company or fund for the first time (which would be a primary investment). Secondary investments provide liquidity to the original investors, allowing them to exit their positions before the fund's or company's lifecycle ends. This type of investment can offer buyers the opportunity to invest in mature assets with potentially lower risk compared to primary investments.

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Total Value to Paid-In (TVPI): A performance metric used in private equity to measure the total value generated by a fund relative to the capital that has been paid in by investors. TVPI is calculated by dividing the sum of the fund's residual value (the value of remaining investments) and distributed value (the cash or stock that has been returned to investors) by the total paid-in capital. It provides an overall assessment of a fund's performance, including both realized and unrealized gains.

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Venture Capital: Investments that provide “seed” or start-up capital, early-stage financing or later-stage financing (including mezzanine-stage financing) to companies that are in early development stages and require additional capital for expansion or preparation for an initial public offering.

Vintage Year: The year in which a private equity fund makes its first investment. This term is used to categorize and compare funds based on the time period during which they began deploying capital. The vintage year is important because it provides context for evaluating the performance of the fund relative to other funds that started investing in the same economic and market conditions. It allows investors to benchmark returns and assess the effectiveness of the fund's investment strategy over time.

Volatility: A statistical measure of the dispersion or variability of returns for a given security or market index. It indicates the degree of variation in the price of an asset over time and is often used as an indicator of risk. Higher volatility means that the asset's price can change dramatically over a short period, reflecting greater uncertainty or risk. Lower volatility indicates more stable prices. Volatility is commonly measured using standard deviation or variance of returns.

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Source: Neuberger Berman, Investopedia, CFA Program Glossary, FCA, SEC.