An A-Z of terms used in Private Equity

Acquisition – The process of buying a company or asset.
Anchor investor – A major investor who commits significant capital to a fund, often attracting other investors.
Auction - A process in which an investment bank or other corporate finance adviser invites several Private Equity houses (and possibly other buyers) to look at a particular company that is for sale and to offer a bid to buy it.
BIMBO - Buy-in management buy-out. A combination of a management buy-in (MBI) and a management buy-out (MBO).
Bolt-on acquisition – An acquisition made by an existing portfolio company.
Bridge financing – Temporary funding used until permanent financing is secured.
Buy and build – A strategy of achieving growth in a portfolio company by making multiple bolt-on acquisitions.
Buy-out – A transaction resulting in an investor or group of investors purchasing a controlling interest in a company.
Buy-out fund - A fund generally focusing on acquiring majority stakes in established companies with stable returns and cash flow.
Capital call – When a private equity fund requests committed capital from its limited partners.
Capital commitment – The total amount a limited partner agrees to invest in a private equity fund.
Capital markets - A marketplace in which long-term capital is raised by industry and commerce, the government and local authorities. Stock exchanges are part of capital markets.
Carried interest - An entitlement accruing to an investment fund’s management company or, usually, individual members of the fund management team. Carried interest becomes payable once the investors have achieved repayment of their original investment in the fund plus a defined hurdle rate.
Clawback – A provision allowing investors to reclaim excess carried interest from carried interest holders if returns do not meet expectations.
Conditions precedent - Conditions that must be satisfied before a deal can complete. These can be commercially imposed by, eg, the PE house investor or can be regulatory in nature (eg competition clearance or financial regulator consent).
Continuation fund – Continuation funds are private equity vehicles that allow fund managers to extend the holding period of select assets beyond the typical fund lifecycle.
Covenant - An agreement by a company that certain activities will or will not be carried out or that certain thresholds will be met
Convertible securities – Investments that can be converted into another form, such as shares or bonds.
Debt fund - Alternative lenders who are often used in PE transactions rather than corporate banks. Typically constituted as a fund in a similar way to a private equity fund.
Dry powder – Capital committed by limited partners to private equity funds that has not yet been invested.
Due diligence – The research and analysis conducted before making an investment. Can take many forms, eg financial, tax, commercial, legal, insurance, technical, environmental etc.
Exit multiple – A metric that calculates the return on an investment upon exit.
Exit strategy – The plan for selling an investment to realise returns, such as through an IPO or a sale to another company or private equity fund.
Family office - A family office is a private wealth management advisory firm that serves ultra-high-net-worth individuals (HNWI). Family offices offer a total solution to managing the financial and investment needs of an affluent individual, family or group of families.
Fee structure – The breakdown of management fees charged by private equity houses and the carried interest arrangements.
Final close – the closing of the final round of capital raising for a private equity fund. New investors can only come into the fund after final close if they are acquiring interests in the fund from existing investors.
First close – The initial round of capital raising followed by further ‘closes’.
Fund manager - Individual advisers who handle investment portfolios. Can also refer to the entity responsible for managing a fund.
Fund of Funds (FoF) – A fund that invests in multiple private equity funds rather than directly in companies.
Fund management – This involves overseeing a pool of money on behalf of individuals, companies, or other entities with the purpose of investing and maximising returns. This is also referred to as investment management and asset management.
General partner (GP) – Strictly an entity within the private equity fund structure but often used more generally to refer to a private equity house (in contrast to limited partners as the investors).
Hurdle rate – A minimum required return that must be met before carried interest is distributed.
Institutional buy-out - A buy-out initiated by institutional investors, such as private equity houses, where they take a controlling interest in the business.
Investment period – The phase during which a fund actively seeks and makes new platform investments. This period is set in the fund’s governing documentation. Bolt-on investments can typically be made after the end of the investment period.
IRR – Together with money multiple the most common performance measure used for funds. IRR changes with the time an investment is held.
J-curve – The trend showing early negative returns followed by stronger performance as investments mature.
Leverage - The use of debt in an investment, including for acquisitions and capital expenditures.
Limited partner (LP) – An entity that commits capital to a general partner’s fund.
Leveraged buy-out (LBO) –A buy-out in which the Newco’s capital structure incorporates a level of debt, much of which is normally secured against the company’s assets.
Management fee - Contractually determined amount paid for the PE house’s performance of its management activity.
Management buy-in (MBI) - A transaction in which external managers take over the company. Financing is provided to enable a manager or group of managers from outside the target company to buy into the company with the support of Private Equity investors.
Management buy-out (MBO) - A management buy-out (MBO) is the most common type of PE transaction, which allows the existing management team, who perhaps has no or little equity ownership, to buy all or part of the business alongside a PE house.
Mezzanine financing – A hybrid form of financing that includes both debt and equity characteristics.
Money multiple - Measures the return on investment. It is calculated by dividing the total cash inflows by the total cash outflows.
Multiple on invested capital - The value or performance of a private equity investment relative to its initial cost.
PE ecosystem - All entities connected to private equity, including funds, investment managers, portfolio companies, bankers, lawyers.
Payment-in-kind (PIK) - An instrument that pays interest or dividends to investors of bonds, notes, or preferred stock with additional securities or equity instead of cash.
Platform investment – An acquisition of a new business by a fund (as distinct from a bolt-on investment which is an addition to an existing portfolio company).
Portfolio company – A company that has been acquired and is held within a private equity firm's investment portfolio.
Private capital - Private investments encompassing the following asset classes: Private Equity, Venture Capital, Private Debt/Credit, Real Estate, and Infrastructure/Real Estate assets.
Recapitalisation – The restructuring of a company’s debt and equity mix.
Secondary buy-out – A buy-out in which a private equity house sells control of a portfolio company to another private equity house.
Staple financing – Pre-arranged financing offered to potential buyers during an M&A process.
Strip (sometimes equity strip or institutional strip) – The institutional series of instruments invested in by a fund (eg ordinary equity, preferred equity and shareholder debt). May also be invested in by vendors rolling over into the new structure.
Sweet equity – Equity (usually shares but sometimes options, performance rights, or rights to further shares) that does not have the level of preference contained in the institutional strip. Often issued at a comparatively low price given it ranks behind any external debt and the preferred instruments in the strip. In high performing portfolio companies sweet equity can deliver a high level of upside.
Term sheet – A non-binding agreement outlining the basic terms of an investment.
Valuation – The process of determining the worth of a company or asset.
Venture capital - A type of private equity investing that focuses on start-ups and early-stage companies with long-term, high-growth potential.
Vintage (year) – The year a private equity fund had its final close, used for benchmarking performance.