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100+ Venture Capital Terms

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private equity glossary

Open-end fundA commingled fund that does not have a finite life, continually accepts new investor capital and makes new property investments. Mutual fundA fund operated by an investment firm that raises money from shareholders and invests in a group of assets, in accordance with the prospectus’s stated set of objectives. Mezzanine financingMezzanine financing is somewhere between equity and debt. It is that piece of the capital structure that has senior debt above it and equity below it. There is both equity and debt mezzanine financing, and it can be done at the asset or company level, or it could be unrated tranches of CMBS. Investment bankInvestment banks do not accept deposits; they are intermediaries only. Investment banks sell products or assist companies with raising capital, typically by underwriting and/or acting as the firm’s agent in the issuance of securities. They also act as a “market maker” by facilitating the trading of securities. Insurance company separate accountA real estate investment vehicle that may only be offered by life insurance companies. This ownership arrangement enables an ERISA-governed fund to avoid the creation of unrelated taxable income for certain types of property investments and investment structures.

private equity glossary

An agreement addressed by a PE fund in an LBO to its acquisition vehicle, which provides a limited guarantee for the equity financing detailed in an SPA. Securing these letters is often required for the PE fund to enter into an SPA and to satisfy buyer financing reps and warranties. In some instances, the PE firm may directly https://www.coindesk.com/harvard-yale-brown-endowments-have-been-buying-bitcoin-for-at-least-a-year-sources provide a limited guarantee on the equity component of the transaction. An agreement in which a lender sets out the terms on which it is prepared to lend money to the borrower. In an LBO, this letter is typically addressed to a buyout fund’s acquisition vehicle by the lead arranger of an LBO’s debt financing.

A soft hurdle means that no performance compensation is received if performance falls short of the soft hurdle rate, but once the soft hurdle rate is exceeded, the manager is entitled to the entire performance compensation. In a large number of funds invoked gate provisions to prevent assets from being sold at severe losses. A capital buy polymath account is an account on the company’s books that shows the owner’s net investment in the company. It is calculated by taking the capital contribution of the owner, adding the owner’s share of company profits, and then subtracting the owner’s share of company losses in addition to the distributions or returns of capital.

Listed Funds (lfs)

Typically, in the United States, Private Equity investors are typically thought of as providers of capital to later stage companies. J-curve- The pattern that emerges from charting cash flows from a fund investment, with losses in early years and profits later as they mature. ‘Fee drag’ contributes to the early dip in the J-curve as routine management fees are paid every year, but it takes many years before the fund investments appreciate. Fund mandate- Rules the fund declares to manage under a specific style or purpose. Because the exact targets and investments are usually unknown when a fund is raised, the mandate gives investors a description of what kind of investments to expect. LOI- After further talks, A Letter of Intent is signed between the Sponsor and target owners.

Institutional-grade propertyVarious types of real estate properties generally owned or financed by institutional investors. Core investments typically include office, retail, industrial and apartments. Initial public offering The first time a private company offers securities for sale to the public. Implied cap rateNet operating income divided by the sum of a REIT’s equity market capitalization and its total outstanding debt. Fannie Mae The Federal National Mortgage Association – A quasi-governmental private equity glossary corporation authorized to sell debentures in order to supplement private mortgage funds by buying and selling FHA and VA loans at market prices. This strategy might employ leverage in the range of 30 to 50 percent with return expectations of 9 percent to 12 percent. Co-investmentCo-investment occurs when two or more pension funds or groups of funds share ownership of a real estate investment. In co-investment vehicles, relative ownership is always based on the amount of capital contributed.

private equity glossary

REIT A business trust or corporation that combines the capital of many investors to acquire or provide financing for real estate. A corporation or trust that qualifies for REIT status generally does not pay corporate income tax to the IRS. Instead, it pays out at least 90 percent of its taxable income in the form of dividends. Rating agenciesIndependent firms engaged to rate the creditworthiness of securities for the benefit of investors. The major rating agencies are Fitch Ratings, Standard private equity glossary & Poor’s and Moody’s Investors Service. Positive Spread Investing The ability to raise funds at a cost significantly less than the initial returns that can be obtained on real estate investments. Placement agentA firm that acts as an intermediary between a fund manager seeking to raise capital and various investors who may be interested in investing in such a fund. Examples of such firms include Park Hill Real Estate, Probitas Partners, Park Madison Partners and Greenhill & Co.

What Is The Intrinsic Value Of A Stock?

This is the more serious letter outlining the intentions of the Sponsor and investors to purchase shares in the target, typically at an estimated purchase multiple or price range, under the condition that diligence goes well. Management fee – An annual fee paid to the Sponsor for their role in managing, operating, or overseeing an investment. 2% of invested capital is a common management fee in the lower middle market, scaling down to the ballpark of 1.5% in larger deals. Secondary purchases- One investor selling securities to another investor. This is typically the exchange between investors during the holding period of a PE investment, before a change of control or liquidity event has happened. Direct investing- The purchasing of ownership in an operating company by an investor. When an investor rolls up their sleeves and opts to directly own shares in an operating company, without the fund structure in between. Often many investors work together, co-investing behind a lead investor or Sponsor who sources, structures, and becomes the primary representative of the investor group post-close. Private equity is the hardest asset for the small investor to obtain directly.

private equity glossary

Generally used by startup companies to help determine the exercise price for company stock options. This is a taste of all the tools and guidance that participants get in our investor training program focused on angel and venture capital investors. Private placement of shares of a publicly listed company to selected investors. A PE fund will invest in a limited number of companies that represent its portfolio of companies. These companies are also referred to as investee companies or, pre-investment, as target companies. Investment vehicles through which investors make “soft commitments” to the fund prior to its investments being identified. Investors are given the right to “opt in” to (or “opt out” of) each investment opportunity that the manager of the fund presents.

Base Case Financial Scenario

A fund raised by the private equity arm of an investment bank or a merchant bank. Funds provided for the major growth expansion of a company whose sales volume is increasing and which is breaking even or profitable. These funds are utilized for further expansion, marketing and working capital or development of an improved product. A private equity fund sponsored by a state government which is set up to finance promising companies located within the respective state. Usually the first institutional venture capital round of financing provided to companies for use in product development. A measure of how much of the investors’ invested capital is still tied up in the equity of the fund. The return on equity amount is calculated by dividing the common stock equity at the beginning of a period into the net income for the period after preferred stock dividends but before common stock dividends.

  • That calmed everyone down and, eventually, the price of things like stocks and bonds recovered.
  • At times, it seemed like the world’s financial system might genuinely collapse.
  • The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.
  • In order to stem the crisis, the US Federal Reserve had to enact some “emergency” measures which, essentially, made it impossible for any more banks to go bankrupt .
  • It is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.
  • Stocks lost more than 50% of their value and major financial institutions, like Lehman Brothers , went bankrupt.

Benchmark– This is a standard measure used to assess the performance of a company. Investors need to know whether or not a company is hitting certain benchmarks as this will determine the structure of the investment package. For example, a company that is slow to reach certain benchmarks may compensate investors by increasing their stock allocation. Fund of funds A private equity fund that primarily takes equity https://en.wikipedia.org/wiki/private equity glossary positions in other funds. is calculated as an annualized effective compounded rate of return, using monthly cash flows to and from investors, together with the residual value as a terminal cash flow to investors. The IR is therefore net, i.e. after deduction of all fees and carried interest. Wash-Out RoundA financing round whereby previous investors, the founders, and management suffer significant dilution.

These options vest over time, so that employees accumulate them gradually and are incentivized to remain at a growing company. If the company is doing well, the underlying stock will rise in value even as the strike price remains the same, and so the options will be more valuable. Corporate VC – corporate VCs are specialized subsidiaries within corporations with a mission to spread their cash around. Some investments are strategic (“Hey, we do similar things, let’s work together…”) or purely financial (“That idea isn’t really in our wheelhouse, but it looks like it’s going to make money, so we want in”), or a blend. Startups can also profit from the corporation’s experience and other resources .

Venture Capital

Usually the right is designed to enable investors to maintain their percentage ownership of the company by purchasing a pro rata share of all new stock sold by the company. Investors also often require company founders to grant first refusal rights on shares the founders own. The right of an investor to sell shares, if a founder or other key employee sells shares. This right is designed to protect the investors against being trapped in an investment after the founders have cashed out. When a fund makes an investment and messages the LPs to put capital into the fund account to invest in the portfolio companies. Contractual clause that protects an investor from having their investment as a percentage of ownership significantly reduced in subsequent rounds of fundraising.

Automatic Conversionis a clause found in certain convertiblesecuritiesthat, upon the occurrence of certain events, automatically changes the type ofsecuritiesowned by an investor. Hedge fundadministratorsperform certain back office accounting, operations and valuation services. Subscription facility management refers to the overseeing of subscription credit lines – revolving credit facilities secured by the uncalled capital of a fund’s investors. Subscription lines can provide google play branding guidelines fund managers with liquidity more quickly than a capital call would, allowing them to quickly respond to opportunities. The management of subscription lines can quickly become complicated, though, making it difficult for fund managers to understand their true liquidity profile. A single-family office is a privately held company responsible for handling the wealth and investment management for an individual family and its generational members via dedicated staff and services.

The issuer promises to repay the full amount of the loan on a specific date and pay a specified rate of return for the use of the money to the investor at specific time intervals. Average maturity – For a bond fund, the average of the stated maturity dates of the debt securities in the portfolio. In general, the longer the average maturity, the greater the fund’s sensitivity to interest-rate changes, which means greater price fluctuation. A shorter average maturity usually means a less sensitive – and consequently, less volatile – portfolio. Private equity is an umbrella term for large amounts of money raised directly from accredited individuals and institutions and pooled in a fund that invests in a range of business ventures. It is common for preferred investors to have a designated number of seats on the Board who only they elect as their representatives. A Summary of Terms like the one described below, should be created and agreed to before you make an equity investment in a private business.

However, a small number of venture capitalists do provide seed capital. It is typically a percentage of limited partner commitments to the fund and is meant to cover the basic costs of running and administering a fund. Management fees tend to run in the 1.5 per cent to 2.5 per cent range, and often scale down in the later years of a partnership to reflect the GP’s reduced workload. The management fee is not intended to incentivise the investment team –carried interestrewards managers for performance. General icx exchange partner– This can refer to the top-ranking partners at a private equity firm as well as the firm managing the private equity fund. Carried interest– The share of profits that the fund manager is due once it has returned the cost of investment to investors. Carried interest is normally expressed as a percentage of the total profits of the fund. The fund manager will normally therefore receive 20 per cent of the profits generated by the fund and distribute the remaining 80 per cent of the profits to investors.

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