A Shares: Different classes of shares are customarily created for different funding rounds in a venture company. Typically, A shares are issued for the A round, B shares for the B round, and so forth.
Absolute return: The return an asset achieves over time, without comparison to the overall market, other assets or benchmarks.
Acquisition: The obtaining of control, possession or ownership of a company.
Added Value: A private equity management team’s exceptional experience, know-how or valuable business contacts which constitute a vital input for the growth of investee companies.
Adjustable Rate Preferred Stock: Preferred stock whose dividend rate changes in response to changes in a reference interest rate.
Adjusted Present Value Model: This model is similar to the Enterprise DCF model, with the difference that the Adjusted Present Value model separates the value of the company into two components: the value of the company’s operations at the cost of capital as if the company had no debt, plus an additional element reflecting the impact on this value of the tax savings related to leverage.
Advisory Board: A committee of LPs within an individual fund delegated by the GPs to give clearance and guidance on any situations involving a possible conflict of interest.
Allocated Capital: The amount (typically calculated as a percentage) of its overall capital that an investor chooses to devote to private equity. Can be thought of as representing the rough amount of capital which an investor would ideally like to have invested in private equity at any one time.
Allocation: Another term for allocated capital, used when expressing a percentage of a whole, i.e. “a 12% allocation to private equity”.
Anchor LP: An investor in a private equity/venture capital fund that commits a significant amount of the total fundraising to the fund upfront.
Angel Investor: A person who provides backing to very early-stage businesses or business concepts. Angel investors are typically entrepreneurs who have become wealthy, often in technology-related industries.
Angel Round: A round of venture capital in which only angels participate, i.e. in which no professional venture capital firm is present.
Annexe Fund: A separate fund formed by the LPs of a fund to provide a pool of top-up capital when the reserves of the fund have proved inadequate, with the aim of avoiding the issues raised by cross-fund investing.
Anti-dilution: Provisions commonly found in the funding agreements governing rounds of investment in venture companies under which the shareholdings of certain shareholders (usually the early-stage investors and entrepreneurs) cannot fall below a specified percentage of the whole.
Asset class: A category of investment, which is defined by the main characteristics of risk, liquidity and return.
Asset cover: One of the indicators used by banks to calculate debt ceiling. It is the extent to which debt is secured against the company’s assets. Banks apply different weighting factors to various classes of asset, depending on their liquidity and the typical reliability of the valuation.
Asset stripping: Dismantling an acquired business by selling off operational and/or financial assets.
Bad leaver: An employee who leaves the company within a short time or who is dismissed for cause, or under other circumstances where the employee is not permitted to retain the benefit of profit-sharing arrangements such as increased value of shares or carried interest.
Balanced fund: Venture capital funds focused on both early stage and development with no particular concentration on either.
Beauty Parade: An accepted mechanism for an investee company to select a provider of financial and professional services. The investee normally draws up a short list of potential providers, who are then invited to pitch for the business.
Benchmark: A previously agreed upon point of reference or milestone at which venture capital investors will determine whether or not to contribute additional funds to an investee company.
Best Efforts Underwriting: The most common form of underwriting agreement, in which the underwriter agrees to use its best efforts to place the offering with prospective investors, but is not committed to purchase any unsubscribed shares.
Beta: A statistical measure of a security’s volatility, compared to the overall market. A beta of less than 1 indicates lower volatility than the general market; a beta of 1 or more indicates higher volatility than the general market.
Bid Premium: That part of a public company’s value which may be ascribed to the possibility of it being taken over (bid for). Where there is a controlling or blocking shareholding there can by definition be no bid premium.
BIMBO: Acronym for Buy-In Management Buyout. A type of buyout transaction which combines the features of both an MBO and an MBI (for both see below). In most cases a senior executive who has worked within the same sector (and may even have worked for the target company in the past) forms a management consortium with existing managers from within the target company.
Board Seats: Venture firms often acquire positions on the board of directors of their portfolio companies. A board seat gives a venture firm a means of monitoring and managing a company they invest in.
Book: “The Book” is the selling document (often called a Sale Memorandum) which is prepared by the investment bank retained on behalf of a business seller (vendor). It describes the business to be sold and will be circulated to a (usually restricted) group of potential buyers, who will typically include at least two or three buyout houses.
Bookbuilding: Process carried out in the period before a flotation in which the lead underwriter(s) invites institutional and retail investors to commit to subscribing to the floating company’s shares.
Bookrunner: The underwriter in charge of the bookbuilding process.
Bottom-Up: The way in which proper analysis of private equity funds should be carried out, that is to say by modelling the individual transactions within a fund in order to build up the “big picture”.
Break Fee: A break fee (also referred to as an inducement fee) is a sum agreed between the offerer and the target company to be paid to the offerer by the target only if specified events occur which prevent the offer from proceeding or if the offer fails.
Bridge Financing: As the name implies, bridge financing is intended as temporary funding that eventually will be replaced with permanent capital. In some cases, lenders will provide buyout firms and venture capital firms with bridge loans so that they can begin investing, before they have closed on capital for their funds. Likewise, a buyout or venture firm might provide a portfolio company with a temporary financing until permanent financing is in place.
Bridge vehicle: A fund raised by a GP on an interim basis, before launching a new fund. Bridge vehicles are often of a smaller size, compare to the normal fund.
Buffer: Unused credit facility or cash reserves.
Burn Rate: The rate at which an investee company consumes investment capital.
Business Angel: A private investor who provides both finance and business expertise to an investee company.
Buy-and-Build Strategy: Active, organic growth of portfolio companies through add-on acquisitions.
Buyout: The oft mentioned “BO”. Generic name for a category of transactions in which debt is used to assist in the acquisition of a controlling position in a company. One of the two main categories of private equity with the other being venture capital.
Buyout Fund: Funds whose strategy is to acquire other businesses; this may also include mezzanine debt funds which provide (generally subordinated) debt to facilitate financing buyouts, frequently alongside a right to some of the equity upside
Capital Call: A demand by a private equity fund for some part of the money which has been committed (i.e. promised) to it by investors. Each such demand, and the payment made pursuant to it, is called a drawdown.
Capital Take-Down: The schedule by which the general partner of a fund draws down capital from the limited partners to be used for investments. Most general partners today call down capital only as they require it, rather than in pre-set amounts according to a rigid timetable.
Capital Under Management: This is the total amount of funds available to fund managers for future investments plus the amount of funds already invested (at cost) and not yet divested.
Captive Fund: A fund in which the main shareholder of the management company contributes most of the capital, i.e. where parent organization allocates money to a captive fund from its own internal sources and reinvests realized capital gains into the fund.
Carried Interest: The general partner’s share of the profits generated through a private equity fund. The carried interest, rather than the management fee, is designed to be the general partner’s chief incentive to strong performance. A 20 percent carried interest—meaning that the remaining 80 percent reverts to the limited partners—has been the industry norm, although some firms now take 25 percent or even 30 percent, based on very strong performance on past funds.
Cash Flow: Net earnings after tax plus depreciation, plus non-cash items.
Cash Flows to Equity Valuation: A variant of the DCF model, where future cash flows to the equity owners of the company are discounted at the cost of the equity, thus directly calculating the equity value.
Catch-Up: This is a common term of the private equity partnership agreement. Once the general partner provides its limited partners with their preferred return, if any, it then typically enters a catch-up period in which it receives the majority or all of the profits until the agreed upon profit-split, as determined by the carried interest, is reached.
Clawback Option: A clawback option requires the general partners in an investment fund to return capital to the limited partners to the extent that the general partner has received more than its agreed profit split. A general partner clawback option ensures that, if an investment fund exits from strong performers early in its life and weaker performers are left at the end, the limited partners get back their capital contributions, expenses and any preferred return promised in the partnership agreement.
Closing or Close: The signing of an LPA (see below). Every fund will have a first close, after which it has legal status and may begin operations, which is usually followed by a series of other closings. Typically the final close will be required to take place not later than one year after the first close.
Club Deal: A deal where several buyout houses pool their resources together when buying a company of significant size, which would be otherwise inaccessible for them alone, either due to the purchase price or fund investment restrictions.
Co-Investor: Although used loosely to describe any two parties that invest alongside each other in the same company, this term has a special meaning in relation to limited partners in a fund. By having co-investment rights, a limited partner in a fund can invest directly in a company also backed by the fund managers itself. In this way, the limited partner ends up with two separate stakes in the company; one, indirectly, through the private equity fund to which the limited partner has contributed; another, through its direct investment. Some private equity firms offer co-investment rights to encourage limited partners to invest in their funds.
Commitment: A legally binding promise by an investor to make a certain amount of money available to a private equity fund on demand.
Committed Capital: When used by an investor, the total of all current commitments to all funds by that investor. When used by a fund, the total amount of capital currently committed to that fund by all investors.
Competing Offer: Another contemporaneous offer for the target company by a third party.
Completion: The moment when legal documents are signed. Normally, also the moment at which funds are advanced by investors.
Conditions precedent: Certain conditions that a venture capitalist may insist are satisfied before a deal is completed.
Consolidation: Also called a leveraged rollup, this is an investment strategy in which an LBO firm acquires a series of companies in the same or complementary fields, with the goal of becoming a dominant regional or nationwide player in that industry. In some cases, a holding company will be created, into which the various acquisitions will be folded. In other cases, an initial acquisition may serve as the platform through which the other acquisitions will be made.
Controlled Auction: A process whereby the potential seller of a business will appoint an intermediary (commonly a investment bank) to prepare a sale memorandum (“the book”) and send it to an agreed list of potential buyers, who will then enter an auction process. Practice varies, but classically there will be at least two stages, with only some of the candidates being selected to move on to the next stage. The ability to figure on this list of potential buyers represents a huge barrier to entry for first time buyout funds.
Convertible: A share or loan note which carries the right in specified circumstances (ex: on a particular date, or when a specified milestone is reached) to be exchanged in whole or in part for equity in the company. The conversion ratio may be fixed or on a sliding scale contingent, for example, on the performance of the company.
Corporate venturing: There is no single definition of corporate venturing that seems to satisfy all parties, so we distinguish indirect corporate venturing – in which a corporate invests directly in a fund managed by an independent venture capitalist – from a direct corporate venturing program, in which a corporate invests directly by buying a minority stake in a smaller, unquoted company.
Covenants: An agreement by a company to perform or to abstain from certain activities during a certain time period. Covenants usually remain in force for the full duration of the time a private equity investor holds a stated amount of securities and may terminate on the occurrence of a certain event such as a public offering. Affirmative covenants define acts which a company must perform and may include payment of taxes, insurance, maintenance of corporate existence, etc. Negative covenants define acts which the company must not perform and can include the prohibition of mergers, sale or purchase of assets, issuing of securities, etc.
Cross-fund Investing: Where a firm invests in the same company at different times from different funds, i.e. uses their current fund towards a financing round in a company which forms part of the portfolio of one of their earlier funds.
Deal Flow: The number of investment opportunities available to a private equity house.
Debenture: An instrument securing the indebtedness of a company over its assets.
Debt financing: Financing by selling bonds, notes or other debt instruments.
Debt service: Cash required in a given period to pay interest and matured principal on outstanding debt.
Development Capital: A quasi-buyout transaction which can typically be distinguished from a buyout by the lack of shareholder control and any significant amount of acquisition debt.
Development Fund: Venture capital funds focused on investing in later stage companies in need of expansion capital.
Dilution: Dilution occurs when an investor’s percentage in a company is reduced by the issue of new securities. It may also refer to the effect on earnings per share and book value per share if convertible securities are converted or stock options are exercised.
Direct Investment: See co-investor.
Disbursement: The flow of investment funds from private equity funds into portfolio companies.
Discounted cash flow (DCF): A method of assessing the value of an investment based on predicted cash flows discounted to take account of the fact that a euro tomorrow is worth less than a euro today.
Distributions: Cash or stock returned to the limited partners after the general partner has exited from an investment. Stock distributions are sometimes referred to as “in-kind” distributions. The partnership agreement governs the timing of distributions to the limited partner, as well as how any profits are divided among the limited partners and the general partner.
Drag-along rights: If the venture capitalist sells his shareholding, he can require other shareholders to sell their shares to the same purchaser.
Drawdown: See Capital Call (Be aware that this term is used in a completely different sense than in other areas such as hedge funds, where it can refer to periods of downside).
Drawdown Notice: Another term for a capital call. Properly used, the mechanism by which a capital call is executed.
Drawndown Captial: When used by an investor, the total amount of committed capital which has actually been requested by its private equity funds. When used by a fund, the total amount of committed capital which it has actually drawndown from its investors.
Due Diligence: A process of inspection that a venture capital or other private equity firm carries out before closing on a deal. Venture capitalists, for example, might review a company’s accounting practices and managerial structure.
Early-stage: Seed and start-up stages of a business.
Early-Stage Fund: Venture capital funds focused on investing in companies in the early part of their lives.
Elevator Pitch: A term comparing the time an entrepreneur has to gain the interest of a venture capitalist for his business idea with an elevator ride.
Enterprise DCF Model: Variant of the DCF model which looks at the company’s operations and calculates the present value of future free cash flows by discounting them with the weighted average cost of capital.
Equity: Ownership interest in a company, represented by the shares issued to investors.
Equity Kicker: In a mezzanine loan, equity warrants payable on exit.
Evergreen Fund: A fund in which returns generated on investments are automatically returned to the general pool, with the aim of keeping a continuous supply of capital on hand for investments.
Exclusivity: An agreement that the potential seller of a company will deal only with one specific potential vendor for a specified period, on pain of financial penalties (usually refunding the buyer’s costs) for any breach.
Exit: The means by which a private equity firm realizes a return on its investment. For venture capitalists, this typically comes when a portfolio company goes public, or when it merges with or is acquired by another company.
Exit Strategy: A private equity house or venture capitalist’s plan to end an investment, liquidate holdings and achieve maximum return.
Expansion Capital: Another term for development capital, usually refers to “money in” transactions (see below).
Financial secondaries: A secondary deal involving a funds’ portfolio of companies that are relatively mature (five to seven years old), with some exits already realized, but not all capital drawn down. The main interest for the buyer is to negotiate a potential discount on the fund portfolio.
First Stage/Round: The first round of financing following a company’s startup phase that involves an institutional venture capital fund.
Follow-on Investment: An additional investment in a portfolio company which has already received funding from a private equity firm.
Founder Economies: An agreement, whereby the founding partners of a private equity/venture capital fund receive a larger share of the capital gains, especially the carried interest, achieved by the fund. Often, a founder may also receive those gains after leaving the fund, as an acknowledgment of his or her role in building the fund.
Free Cash Flow: Free cash flow is defined as the after-tax operating earnings of the company, plus non-cash charges (e.g. depreciation), less investment in working capital, property, plant and equipment, and other assets.
Fund: A private equity investment fund is a vehicle for enabling pooled investment by a number of investors in equity and equity-related securities of companies (investee companies). These are generally private companies whose shares are not quoted on any stock exchange. The fund can take the form either of a company or of an unincorporated arrangement such as a limited partnership.See limited partnership.
Fund Cycle: The natural rhythm of a fund’s operations. Very broadly this will usually take the form of an investment period (typically about three years, through venture funds will continue to invest money into companies for some years), followed by a development period and a harvesting period, which is when exits are effected.
Fund of Funds: A private equity fund that, instead of being used to make direct investments in companies, is distributed among a number of other private equity fund managers, who in turn invest the capital directly. Funds of funds often give individual limited partners access to funds from which they would otherwise be excluded. Also, by spreading the capital more widely, the risk to limited partners is reduced.
Fund Raising: The process through which a firm solicits financial commitments from Limited partners for a private equity fund. Firms typically set a target when they begin raising the fund, and ultimately announce that the fund has closed at such-and-such amount, meaning that no additional capital will be accepted. Sometimes, however, the firms distinguish between interim closings (first closings, second closings, etc.) and final closings. The term cap is used to describe the maximum amount of capital a firm is willing to accept into its fund.
Fundraising Cycle: The period between raising one fund and its successor fund. Typically about three years for primary funds and about two years for secondary funds.
Gatekeepers: Specialist advisers who provide assistance to institutional and corporate investors when making private equity investments.
Gearing: Another word for leverage (see below), which describes the effect of debt on a transaction or company.
General Partner: In addition to being used as a title for top-ranking partners at a private equity firm, general partner (or general partnership) is used to distinguish the firm managing the private equity fund from the limited partners, the individual or institutional investors who contribute to the fund.
General Partner Clawback: This is a common term of the private equity partnership agreement. To the extent that the general partner receives more than its fair share of profits, as determined by the carried interest, the general partner clawback holds the individual partners responsible for paying back the limited partners what they are owed.
General Partner Contribution: The amount of capital that the fund manager contributes to its own fund in the same way that a limited partner does. This is an important way in which limited partners can ensure that their interests are aligned with those of the general partner. The U.S. Department of Treasury recently removed the legal requirement of the general partner to contribute at least 1 percent of fund capital. However, a 1 percent general partner contribution remains common, particularly among venture capital funds.
Generalist Fund: Funds with either a stated focus of investing in all stages of private equity investment, or funds with a broad area of investment activity.
Grandfather Rights: Special rights given to a limited partner to access a follow-on fund, after having been invested in the previous fund.
Grandstanding: When young, developing companies are rushed to an IPO by an inexperienced private equity organisation in order to demonstrate a successful exit record for the managment team.
Hands-off: A private equity investment in which the venture capitalist contributes only capital – and not business know-how or management involvement – to the investee company.
High Yield Bonds: These play a similar role to mezzanine finance in bridging the gap between senior debt and equity. High yield bonds are senior subordinated notes not secured against the assets of the company, and which therefore attract a higher rate of interest than senior debt.
Hostile Offer (or hostile bid): An offer which is made for a target company but which isnot recommended for acceptance by shareholders by the board of the target company.
Hurdle Rate: A rate of return that must be achieved before a manager becomes entitled to carried interest payments from a fund; usually set as an IRR (Internal Rate of Return) but related to the risk free rate of return an investor could obtain in the same country as the fund is investing in.
Inception: The starting point at which IRR calculations for a fund are calculated; the vintage year or date of first capital drawdown.
Incubator: An entity designed to nurture business concepts or new technologies to the point that they become attractive to venture capitalists. An incubator typically provides both physical space and some or all of the services—legal, managerial, technical—needed for a business concept to be developed. Incubators often are backed by venture firms, which use them to generate early-stage investment opportunities.
Independent Fund: One in which the main source of fundraising is from third parties. Compare with captive fund, semi-captive fund.
Initial Public Offering (IPO): When a privately held company—owned, for example, by its founders and its venture capital investors—offers shares of its stock to the public.
Institutional Buyout: Known by its acronym IBO. Outside financial investors (eg private equity houses) buy the business from the vendor. The existing management may be involved from the start and purchase a small stake. Alternatively, the investor may install its own management.
Institutional Investor: An organization such as a bank, investment company, mutual fund, insurance company, pension fund or endowment fund, which professionally invest, substantial assets in international capital markets.
Internal Rate of Return (IRR): The IRR is the interim net return earned by investors (Limited Partners), from the fund from inception to a stated date. The IRR is calculated as an annualised 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 IRR is therefore net, i.e. after deduction of all fees and carried interest. In cases of captive or semi-captive investment vehicles without fees or carried interest, the IRR is adjusted to created a synthetic net return using assumed fees and carried interest.
Investment Committee: A committee within a private equity/venture capital fund, fund of funds or limited partner that has the final decision on the individual investments made. Members of the committee are either part of the fund or sometimes outside experts.
Investment Philosophy: The stated investment approach or focus of a management team. See Focus.
Investment Services Directive (ISD): A Directive produced by the European Commission regarding the provision of investment services within the member states of the European Union. It has been described as the passport to Europe for securities houses. The ISD’s key feature is mutual recognition: a) any firm approved to provide investment services within its home state is mutually recognised by all other member states as being allowed to provide the same services within those other member states; b) any stock market or exchange recognised by its Competent Authorities within one member state is mutually recognised in all other member states as being allowed to offer its services (including the installation of trading system computer terminals) within those other member states. The result of ISD will be a borderless single marketplace for securities covering all member states of the European Union. See Competent Authority, Prospectus Directive.
Irrevocable Undertaking: A binding agreement entered into by the shareholders (including directors acting as shareholders) of the target company to accept the proposed offer in relation to shares held by them. A “hard” irrevocable undertaking is an unconditional binding agreement to accept the offer in any circumstances and is usually only given by those shareholders who are also part of the participating management team. A soft irrevocable undertaking is a conditional commitment to accept the offer subject only to a higher offer not being made and is usually given by institutional shareholders. Irrevocable undertakings are sometimes simply referred to as irrevocables.
J-Curve: The curve generated by plotting the returns generated by a private equity fund against time (from inception to termination). The common practice of paying the management fee and start-up costs out of the first drawdowns does not produce an equivalent book value. As a result, a private equity fund will initially show a negative return. When the first realisations are made, the fund returns start to rise quite steeply. After about three to five years the interim IRR will give a reasonable indication of the definitive IRR. This period is generally shorter for buyout funds than for early stage and expansion funds.
Junk Bond: A junk bond is a bond on company debt, which is rated as ‘BB’ or lower, assuming some risk of being repaid by the company. Junk bonds are also known as “High-yield-bonds”. Within the private equity market, junk bonds are related to buyout investments, when bonds of a transactions are rated as ‘BB’ or less.
Key Man Insurance: A life and/or critical illness insurance policy taken out by a company to provide a cash sum if a key executive dies or becomes ill, thus covering some or all of the resulting financial loss to the business.
Later Stage: Expansion, replacement capital and buyout stages of investment
Lead Bank: The lead bank in a loan syndication that underwrites the deal, structures and syndicates the loan to other banks or investors in the market.
Lead Investor: The firm or individual that organizes a round of financing, and usually contributes the largest amount of capital to the deal.
Lead Underwriter (or Lead Manager): The underwriter that assumes leadership and financial responsibility for placing the securities offered in a public offering. On the cover of a prospectus, the lead underwriter/manager is normally listed on the bottom of the page on the left-hand side, with the other underwriters listed to the right.
Leavers and Joiners: The arrangements covering: what happens to the profit interest (through carried interest or ownership of shares) of executives who leave an investee company or a venture capital fund; the provision for making a profit-sharing interest available to rising stars (new or young executives who previously did not have such a profit-sharing interest) or new joiners.
Lehman Formula: A compensation formula initiated by Lehman Brothers for investment banking activities, originally structured as follows: 5% of the first $ million involved in the transaction; 4% of the second $ million ; 3% of the third $ million ; 2% of the fourth $ million ; and 1% of everything thereafter (ie above $4 million).
Letter of Intent: A letter from the venture capitalist to the investee company indicating a general willingness or intention to engage in some type of transaction. It often precedes negotiation of a complete agreement, and is typically structured so that it is not legally binding on either party.
Leveraged Buyout (LBO): The acquisition of a company in which the purchase is leveraged through loan financing, rather than being paid for entirely with equity funding. The assets of the company being acquired are put up as collateral to secure the loan.
Leverage Loan Market: The market in which leverage loans are syndicated by a lead bank and hence sold on to other borrowers.
Leveraged Recapitalization: Transaction in which a company borrows a large sum of money and distributes it to its shareholders.
Leveraged Roll-Up: See consolidation.
Limited Partners: Institutions or individuals who contribute capital to a private equity fund. Limited partners typically are pension funds, private foundations, and university endowments. However, private equity firms themselves may serve as limited partners in other firms’ funds, as, for example, when a large buyout firm channels money to a fund managed by a venture capital firm. See also general partner.
Limited Partner Clawback: This is a common term of the private equity partnership agreement. It is intended to protect the general partner against future claims, should the general partner or the limited partnership become the subject of a lawsuit. Under this provision, a fund’s limited partners commit to pay for any legal judgment imposed upon the limited partnership or the general partner. Typically, this clause includes limitations on the timing or amount of the judgment, such as that it cannot exceed the limited partners’ committed capital to the fund.
Limited Partnership: The legal structure used by most venture and private equity funds. The partnership is usually a fixed-life investment vehicle, and consists of a general partner (the management firm, which has unlimited liability) and limited partners (the investors, who have limited liability and are not involved with the day-to-day operations). The general partner receives a management fee and a percentage of the profits. The limited partners receive income, capital gains, and tax benefits. The general partner (management firm) manages the partnership using policy laid down in a Partnership Agreement. The agreement also covers, terms, fees, structures and other items agreed between the limited partners and the general partner.
Liquidation: The sale of the assets of a portfolio company to one or more acquirors where venture capital investors receive some of the proceeds of the sale.
Listed Company: A company whose shares are traded on a stock exchange.
Listed Security: A security that has been accepted for trading on an exchange. To become a listed security, the issuer must satisfy the listing requirements of the exchange. Shares that are not listed may be sold over-the-counter (OTC).
Listing: The quotation of shares on a recognised stock exchange. See Float
Listing Requirements: The standards to be satisfied for a security to be admitted to trading on an exchange. Listing requirements vary among exchanges but commonly include financial standards and levels of market capitalisation.
Lock-up Period: The period of time for which a lock-up agreement is in operation. Underwriters of IPOs generally insist upon a lock-up period for large shareholders of at least 180 days to avoid a disorderly market. The management, company directors and the venture capitalist are the type of shareholders that are usually subject to a lock-up.
London Inter-Bank Offer Rate (LIBOR): The interest rate that the largest international banks charge each other in the London inter-bank market for loans. This is used as a basis for gauging the price of loans outside the inter-bank market.
LPS: See limited partner, limited partnership.
Majority Share/Interest: The ownership of a company, where the owner holds more than 50% of the total shareholding.
Managed Secondaries: A secondary deal involving a portfolio of companies that are relatively young (two to four years old), where the underlying companies are starting to move up the J-curve and the further potential for value creation provide the main interest for the buyer.
Management Buyin (MBI): A buyout 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 Buyout (MBO): The acquisition of a company by its management, often with the assistance of a private equity investor.
Management Fee: This annual fee, typically a percentage of limited partner commitments to the fund, is meant to cover the basic costs of running and administering a fund. Management fees tend to run in the 1.5 percent to 2.5 percent range, and often scale down in the later years of a partnership to reflect the reduced work load of the general partner. The management fee is not intended to be the primary source of incentive compensation for the investment team. That is the job of the carried interest.
Manager Sponsorship: A limited partner taking a direct interest in the a general partner, in the formative stage of the fund.
Managing Underwriters: The underwriters: whose names appear on the cover page of the prospectus; who assist the company in preparation of the prospectus and the roadshow; who organise the syndicate of underwriters to sell the securities. See Lead Underwriter.
Market Authority: Governing entity of a stock exchange or trading system responsible for: market regulation; approval of members; admission to and cancellation of listing; the operation of the trading system.
Market Capitalization (or Market Cap): The number of shares outstanding multiplied by the market price of the stock. Market capitalization is a common standard for describing the worth of a public company.
Market Maker: Brokerage and securities firms that are required by the rules of a stock market/exchange to both buy and sell securities of a quoted company, for which they act as market marker, at bid and offer prices which they quote. All Nasdaq-traded companies are required to have at least two market makers.
Mature Funds: Funds that have been in existence for over two years.
Median IRR: The Value appearing halfway in a table ranking funds by IRR in descending order.
Memorandum: Brochure presented by a general partner in the process of raising funds. This document is dedicated to potential investors (limited partners), and usually contains (amongst other information) a presentation of the management team’s track record, terms and conditions and investment strategies.
Mezzanine Finance: Loan finance that is halfway between equity and secured debt, either unsecured or with junior access to security. Typically, some of the return on the instrument is deferred in the form of rolled-up payment-in-kind (PIK) interest and/or an equity kicker. Compare with High Yield Bond.
Mezzanine Fund: A mezzanine fund is a fund focusing on mezzanine financing. Used to provide a middle layer of financing in some leveraged buyouts, subordinated to the senior debt layer, but above the equity layer.
Mid-Market Value: The average of bid and offer price.
Minority Share/Interest: The ownership of a company, where the owner holds less than 50% of the total shareholding.
Multi-Family Office: A family office providing services to several families and its members, often integrated in a bank or financial institution.
Multiples or Relative Valuation: This estimates the value of an asset by looking at the pricing of “comparable” assets relative to a variable such as earnings, cash flows, book value or sales. See P/E ratio.
Mutual Fund: An open-end fund that may sell as many shares as investors demand. As money flows in, the fund grows. If money flows out of the fund, the number of the fund’s outstanding shares drops. Open-end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund. Compare with Closed-Ended Fund.
NASD (National Association of Securities Dealers): The national organisation of the USA securities industry. Under USA law, as a self regulatory organisation, NASD has substantial responsibility for regulation of broker-dealers, as well as for the operation of the Nasdaq markets
Nasdaq Bulletin Board (or OTC Bulletin Board): A regulated quotation service that displays real-time quotes, last-sale prices, and volume information in the over-the-counter equity securities. Although operated by Nasdaq Stock Market, it is not part of the Nasdaq Stock Market. See Over-the-Counter (OTC).
Nasdaq National Market (formerly NASDAQ NMS): The larger and higher quality of the two markets administered by the Nasdaq Stock Market. The Nasdaq National Market is now one of the largest stock markets in the world in terms of volume of shares traded. The Nasdaq markets are not physical stock exchanges in the traditional sense. In place of an exchange floor, they use computer-based trading and trade support systems. See Nasdaq-Amex Market Group, Nasdaq SmallCap Market, Nasdaq Bulletin Board.
Nasdaq SmallCap Market: A stock market for smaller companies which cannot satisfy the listing requirements of the Nasdaq National Market. See Nasdaq Stock Market.
Nasdaq Stock Market: The Nasdaq Stock Market (based in Washington, D.C.) has two tiers, the Nasdaq National Market and the Nasdaq SmallCap Market. Each tier has its own set of financial requirements that a company must meet to list its securities. Nasdaq also operates the Nasdaq (OTC) Bulletin Board. The Nasdaq markets are not physical stock exchanges in the traditional sense. In place of an exchange floor, they use computer-based trading and trade support systems. In 1998, Nasdaq and the American Stock Exchange combined into one corporate organisation, the Nasdaq-AMEX Market Group.
Net Debt: Net debt is calculated as short and long-term interest-bearing debt minus cash (and equivalents) The concept of net debt is the same under cash and accrual-based financial reporting. High levels of net debt impose a call on future revenue flows to service that debt. One shortcoming of the net debt concept is that it does not provide information on whether debt has been incurred to finance fixed asset accumulation or current expenditure. Calculation: debt due within one year excluding bank overdrafts + debt due after one year – cash in hand and at bank – overnight deposits + bank overdrafts + other current investments = Net debt
Neuer Markt: Established in 1997 and closed down in June 2003, the Neuer Markt was a trading segment of Deutsche Börse AG (German Stock exchange) which focused on high-growth companies.
New Issue: A stock or bond offered to the public for the first time. New issues may be IPOs by previously private companies or additional stock/bond issues by companies already public.
NewCo: A generic term for a new company incorporated for the purpose of acquiring the target business, unit or company from the vendor in a buyout transaction.
Non Executive Director (NED): A member of the board of Directors of a company who has no management or executive function within the underlying company.
Non-Disclosure Agreement: See Confidentiality and Proprietary Rights Agreement.
Non-Discretionary Client: Client who is involved in the decisions taken by the investment manager managing the clients assets.
Nouveau Marché: Established in 1996 and dissolved in June 2005, the Nouveau Marché was a stock market dedicated to innovative companies with high-growth potential. It was based in Paris, France and managed by Euronext.
Professional Standards: A unique set of behavioural principles that encompass the relationship between limited partners, general partners and portfolio companies. The EVCA Professional Standards encompass a Code of Conduct, Governing Principles, and Corporate Governance, Valuation and Reporting Guidelines.
Offer: The offer (or bid) made for the target company by the Newco offeror established by the private equity provider and the participating directors of the target company (those who are part of the management buyout team).
Offer Document: The document by which the offeror makes the formal legal offer to target shareholders.
Offer Period: The period from announcement of an offer or potential offer until the closing date for the offer or the date when the offer becomes or is declared unconditional as to acceptances (that is, the acceptance condition, which requires a certain percentage of shareholders to accept, has been satisfied) or the offer lapses.
Offerer: The Newco entity established to make the offer for the target company.
Open-End Fund: A fund which sells as many shares as investors demand. Compare with Closed-Ended Fund, Mutual Fund.
Opening Price: The price at which a security trades at the beginning of a day or, in the case of an IPO, at the commencement of its first day of trading.
Option: A contractual right to purchase something (such as stock) at a future time or within a specified period at a specified price.
Option Pool: The number of shares set aside to be issued to employees of a private company.
Ordinary Shares (or Common Shares/Stock): In a public company, the stock which is traded between investors on various exchanges. Owners of ordinary shares are typically entitled to vote on the selection of directors and other important issues. They may also receive dividends on their holdings, but ordinary shares do not guarantee a return on the investment. If a company is liquidated, the owners of bonds and preferred stock are paid before the holders of ordinary shares.
OTC Bulletin Board: See Nasdaq Bulletin Board.
Overhang: Private equity funds still available for investment in the industry.
Over-the-Vounter (OTC): A security which is not traded on an exchange, usually due to an inability to meet listing requirements. For such securities, broker/dealers negotiate directly with one another over computer networks and by phone. See Nasdaq Bulletin Board.
Price/Earnings (P/E) Ratio: The market price of a company’s ordinary share divided by earnings per share for the most recent year.
Paid-In Capital: The amount of committed capital an investor has actually transferred to a fund. Also known as the cumulative takedown amount.
Pay-As-You-Go (PAYG) System: A pillar one pension system under which the social security contributions by workers are used directly to pay out the benefits to retirees.
Payment-in-Kind (PIK): A feature of a security permitting the issuer to pay dividends or interest in the form of additional securities of the same class. See Mezzanine Finance.
Permanent Establishment: A permanent establishment is, according to the OECD definition, a fixed place of business through which the business of an enterprise is wholly or partly carried on. Within private equity, permanent establishment refers to the possibility that a limited partner, either owning or having a stake in a private equity or venture capital fund, is considered as a resident of that country and hence liable for the national taxation.
Permitted Transfer: A transfer of shares in which it is not required to first offer them to existing shareholders.
Pillar One Pension: Pillar one refers to the public pension provisions, which are provided by the government.
Pillar Two Pension: Pillar two refers to the occupational pension provisions, which are provided by the employer.
PIPEs: An acronym for “private investing in public equities.” See private placement.
Placement Agent: An outside firm hired by a general partner to market its fund to institutional investors. The general partner typically pays a 2 percent fee of the capital raised from new sources by the placement agent.
Poison Pill: The most famous anti-take-over device. It normally takes the form of granting existing stockholders (other than stockholders who acquire more than a certain percentage of the company) the option (which can only be exercised upon certain events) to buy more stock on very favourable terms as a way of diluting the position of the person trying to take control. See Anti-Dilution provisions, Anti-Dilution (Full Ratchet), Anti-Dilution (Weighted Average), Blank Check Preferred Stock, Shark Repellent.
Pooled IRR: The IRR obtained by taking cash flows from inception together with the Residual Value for each fund and aggregating them into a pool as if they were a single fund. This is superior to either the average, which can be skewed by large returns on relatively small investments, or the capital weighted IRR which weights each IRR by capital committed. This latter measure would be accurate only if all investments were made at once at the beginning of the funds life.
Portfolio at Cost: The portfolio at cost is the sum of all private equity and venture capital investments (held at cost) that have been made until the end of the measurement period and that have not yet been exited.
Portfolio Company: A company in which a venture capital firm or buyout firm invests. All of the companies currently backed by a private equity firm can be spoken of as the firm’s portfolio.
Post-Money Valuation: The valuation made of a company immediately after the most recent round of financing. See Pre-Money Valuation.
Pre-Seed Stage: The investment stage before a company is at the seed level. Pre-seed investments are mainly linked to universities and to the financing of research projects, with the aim of building a commercial company around it later on.
Pre-Emption Rights: Rights of existing shareholders to have the first opportunity to purchase shares from a departing shareholder (pre-emption on transfer), or to subscribe for new shares issued by the company (pre-emption on issue).
Preferred Return: The preferred return is a minimum annual internal rate of return sometimes promised to the limited partners before the general partner shares in profits. In effect, the preferred return ensures that the general partner shares in the profits of the partnership only to the extent that the investments perform well. Once the preferred return is met, there is often a catch-up period in which the general partner receives the majority or all of the profits until it reaches the agreed upon profit-split, as determined by the carried interest.
Preferred Stock: This is one of the most common classes of shares for venture capital and buyout firms to hold. Preferred stock pays dividends at a set rate, and holders get paid before common stock holders in the event of a liquidation. Convertible preferred stock is convertible into common stock at a pre-determined price per share.
Pre-Money Valuation: The valuation made of a company prior to a new round of financing. Compare with Post-Money Valuation.
Present Value: Present value is found by dividing the future payoff by a discount factor which incorporates the interest forgone for not receiving this payoff at the present time.
Price-Sensitive Information: Confidential information about a company, which, if made public, is likely to have a significant effect on the price of the securities of the company.
Primary Distribution: A distribution of shares by the issuer itself, as opposed to a secondary distribution by an existing stockholder.
Primary Loan Market (or Syndicated Loan Market): Market in which a new loan is syndicated/sold.
Private Company: A firm whose ordinary shares are owned by relatively few individuals and are generally unavailable to outsiders.
Private Equity: Private equity provides equity capital to enterprises not quoted on a stock market. Private equity can be used to develop new products and technologies, to expand working capital, to make acquisitions, or to strengthen a company’s balance sheet. It can also resolve ownership and management issues. A succession in family-owned companies, or the buyout and buyin of a business by experienced managers may be achieved using private equity funding. Venture capital is, strictly speaking, a subset of private equity and refers to equity investments made for the launch, early development, or expansion of a business. See Venture Capital, Venture Capitalist.
Private Equity Advisor: An outside firm hired by an institutional investor, such as a state retirement system, to handle the selection, negotiation and monitoring of private equity funds. An advisory assignment can be non-discretionary, in which the institutional investor retains the final say on investment decisions, or discretionary, in which the advisor has the legal authority to make investment decisions on the client’s behalf.
Private Placement: This term is used specifically to denote a private investment in a company that is publicly held. Private equity firms that invest in publicly traded companies sometimes use the acronym PIPEs to describe the activity—private investing in public equities. Occasionally, private investors will acquire 100 percent of the shares of a publicly traded company, a process known as a “going-private” deal.
Prospectus: A document which must be delivered to recipients of offers to sell securities and to purchasers of securities in a public offering and which contains a detailed description of the issuer’s business. In the USA, it is included as part of the registration statement filed with the SEC and with documents required by stock markets, stock exchanges and national competent authorities.
Prospectus Directive: A Directive of the European Commission requiring the implementation of a set of common standards for securities prospectuses into the national law of all member states of the European Union. A key feature of this Directive is that of mutual recognition (a prospectus that has been approved by the appropriate competent authority of one member state is mutually recognised by the competent authorities of all other member states). See Investment Services Directive (ISD).
Prudent Person Rule: A behaviourally-oriented standard of investment, rather than one based on quantitative criteria. The prudent person rule allows pension funds to include private equity and venture capital funds in their asset allocation according to their own needs, while respecting the risk profile of their clients.
Public Float: See Float.
Public Offering: An offering of stock to the general investing public. The definition of a public offering varies from country to country, but typically implies that the offering is being made to more than a very restricted number of private investors; that road shows promoting the offering will be open to more than a very restricted audience; or that the offering is being publicised. For a public offering, registration of prospectus material with a national competent authority is generally compulsory.
See IPO.
Public to Private: A transaction involving an offer for the entire share capital of a listed target company by a new company, i.e. a “Newco”, followed by the subsequent reregistration of that listed target company as a private company. The shareholders of “Newco” usually comprise members of the target company’s management and private equity equity providers. Additional financing for the offer is normally provided by other debt providers.
Put Option: The right of an investor to demand repurchase by the company or by another investor of a certain number of its shares at a fixed price within a specified time period or at a specified point in time.
See call option.
Quartile: The IRR which lies a quarter from the bottom (lower quartile point) or top (upper quartile point) of the table ranking the individual fund IRRs.
Quasi-Equity: Financing that combines the features of debt and equity. Those instruments are unsecured and convertible on exit. Examples are mezzanine finance or subordinated debt.
Ratchet/Sliding Scale: A bonus where capital can be reclaimed by managers of investee companies, depending on the achievement of corporate goals.
Real Options Valuation: This model places a present value on the “real options” available to a company.
Realization Ratios: Benchmark measurements of investment performance which complement IRR. Realization ratios are distributions to paid-in capital (D/PI), residual value to paid-in capital (RV/PI) and total value to paid-in (TV/PI). These are measures of returns to invested capital. These measures do not take the time value of money into account.
Realized Multiple: The ratio of total gain(/loss) to cost of realised investments.
Recapitalization: Change in a company’s capital structure. For example, a company may want to issue bonds to replace its preferred stock in order to save on taxes. Re-capitalisation can be an alternative exit strategy for venture capitalists and leveraged buyout sponsors.
Redeemable Cumulative Preference Share: A form of preference shares which provide that, if one or more dividends are omitted, these dividends accumulate and must be paid in full before other dividends can be paid on the company’s ordinary shares. Redeemable cumulative preference shares can be refinanced by mezzanine providers, banks and other institutional equity providers, thus allowing the initial investors to recover their investment.
Redemption: Repurchase by a company of its securities from an investor. Often required for preferred stock in private equity financing.
Refinancing Bank Debt: Financing to reduce a company’s level of gearing.
Relative Return: The return an asset achieves over time, when taking into account the overall market, other assets or benchmarks.
Replacement Capital (Secondary Purchase): Purchase of existing shares in a company from another private equity investment organisation or from another shareholder or shareholders.
Reporting – EVCA Reporting Guidelines: Guidelines set by EVCA concerning reporting practices towards investors. Their aim is improve transparency, so that investors are better able to monitor and evaluate the performance of their investments and to make the asset class more accessible and comprehensible to new and existing investors.
Representations and Warranties (“Reps and Warranties”): Declarations made by the seller of one or more target companies in relation to the financial, legal and commercial status of the target companies, the financial instruments (to be) issued, the assets owned or used and the liabilities due, and whereby such persons represent and warrant that such declarations are true and correct as of a certain date. The representations and warranties are a standard part of the share-purchase agreement, subscription agreement or asset-purchase agreement, depending on the type of transaction. In the event that the representations and warranties are breached, the beneficiary will be entitled to an indemnity.
Repurchase Agreement: An agreement in which a holder of shares agrees that the person from whom it purchased the securities may repurchase them in certain events. In private equity financing rounds, founders may be required to enter into repurchase agreements in which they agree to resell their shares to the company at a fixed price in the event that they leave the company before a given date.
Rescue (or Turnaround): Financing made available to an existing business which has experienced trading difficulties, with a view to re-establishing prosperity.
Residual Value: The estimated value of the assets of the fund, net of fees and carried interest.
Residual Value to Paid-In Capital (RV/PI): A realisation ratio which is a measure of how much of a limited partner’s capital is still tied up in the equity of the fund, relative to the cumulative paid-in capital. RV/PI is net of fees and carried interest.
Restricted Securities: Public securities which are not freely tradable due to securities regulations.
Restrictive Covenant: In the context of venture capital, an agreement in which the executive management of an investee company or a private equity fund undertakes not to carry on competing activities.
Retail Investor: A non-institutional investor who purchases securities for his own account.
Reversed Merger: Selling your company to a quoted company, by taking a strong equity position in the quoted company.
Roadshow: The process during a public offering or fundraising in which the management of the issuing company and the underwriters meet with groups of prospective investors to stimulate interest in the stock to be offered. Roadshows may be arranged in several cities/countries, and are conducted during the waiting period shortly before the registration statement becomes effective.
Rounds: Stages of financing of a company. A first round of financing is the initial raising of outside capital. Successive rounds may attract different types of investors as companies mature.
Residual Value to Paid-In (RVPI): The RVPI measures the value of the investors’ (Limited Partner’s) interest held within the fund, relative to the cumulative paid-in capital. RVPI is net of fees and carried interest. This is a measure of the fund’s “unrealized” return on investment.
S&P (Standard & Poor) 500: A market-value weighted index of the 500 largest stocks in the US markets maintained by Standard & Poor Corporation. Generally considered to be a benchmark of the overall US stock market. See index.
Search Fund: A fund that is raised by entrepreneurs to find a business, acquire it and manage it until and exit can be achieved.
SEC: See Securities and Exchange Commission.
Second Line Loan: A loan is used in leverage buyouts, that is subordinated to a senior loan (first-lien loan), but has a preferential settlement over a mezzanine loan.
Second Preferred Stock: Preferred stock which has rights subordinate to those of other preferred stock on dividend and assets.
Secondary Distribution (or Secondary Offering): A public offering of a security by a selling holder of securities, rather than by the issuer. The term secondary offering is also sometimes used more generally in reference to any public offering other than an IPO. Compare with primary distribution.
Secondary Fund of Funds: See fund of funds.
Secondary Investment: An investment where a fund buys either, a portfolio of direct investments of an existing private equity fund or limited partner’s positions in these funds.
Secondary Loan Market: Market in which loans trade after their primary market syndication.
Secondary Market: A market or exchange in which securities are bought and sold following their initial sale. Investors in the primary market, by contrast, purchase shares directly from the issuer.
Secondary Sale: The sale of private or restricted holdings in a portfolio company to other investors.
Secured Debt: Loans secured against a company’s assets.
Secured Obligation: A debt obligation which is secured by the pledge of assets.
Securities Act of 1933 (also 1933 Act or 33 Act): US Federal law regulating the offer and sale of securities by the issuer or its affiliates. It generally requires issuers seeking to raise funds from the public to provide investors with extensive information. Its liability provisions, particularly for incorrect registration statements, create a liability rule of caveat vendor or let the seller beware.
Securities and Exchange Commission (SEC): American, independent, non-partisan, quasi-judicial regulatory agency responsible for administering the federal securities laws. These laws protect investors in securities markets and ensure that investors have access to all material information concerning publicly traded securities. Additionally, the SEC regulates firms that trade securities, people who provide investment advice, and investment companies.
Seed Stage: Financing provided to research, assess and develop an initial concept before a business has reached the start-up phase. See early stage.
Seed-Stage Fund: A pool of money used to back companies too small to attract mainstream venture firms.
Semi-Captive Fund: A fund in which, although the main shareholder contributes a large part of the capital, a significant share of the capital is raised from third parties. Compare captive fund, independent fund.
Senior Debt: A debt instrument which specifically has a higher priority for repayment than that of general unsecured creditors. Typically used for long-term financing for low-risk companies or for later-stage financing. Compare subordinated debt.
Separate Account Client: A client who’s account is held separately from the collective funds managed by the management company. Separate accounts can be discretionary and non-discretionary.
Sequence: The classification of funds by order of investment. First in a sequence is the new fund, defined as the first fund a management group raises together, regardless of the experience level of individual professionals in that group. Next are follow-on funds, defined as subsequent funds (II, III, IV, etc) raised by the same management group.
Share Deal: Making an acquisition by purchasing the company’s shares. Compare asset deal.
Share Purchase Agreement: Agreement further to which one or more purchasers buy shares issued by one or more target companies from one or more sellers. The agreement will set out/forth the type and amount of shares sold, the representations and warranties, the indemnification in the event of misrepresentation and may also include post-closing covenants (such as the obligation for the sellers not to compete with the purchasers).
Shark Repellent: Defence mechanisms or tactics designed to discourage undesired take-over bids. See Anti-Dilution Provisions, Anti-Dilution (Full Ratchet), Anti-Dilution (Weighted Average), Blank Cheque Preferred Stock, and Poison Pill.
Shell: The term shell typically refers to a company that has been duly organised and is currently in existence, but that has no history of operations.
Short Sale: Borrowing a security (or commodity futures contract) from a broker and selling it, with the understanding that it must later be bought back (hopefully at a lower price) and returned to the broker. SEC rules limit the circumstances in which investors can sell short
Single-Family Office: A family office providing services to one family, but several generations of family members.
Small Business Investment Company: A licensed member of a U.S. Small Business Administration program that entitles an investment firm to obtain matching federal loans for its private equity investments. Typically, a firm will have access to $2 in credit for every $1 that it invests in a company. If an SBIC raises $20 million, it will have access to up to $40 million in low-interest loans, drawn down on a deal-by-deal basis.
SME (Small and Medium-Sized Enterprises): According to the European Commission definition, “Small and medium-sized enterprises (SMEs) are those businesses which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million”.
Sophisticated Investor: US term for an investor who is deemed to be sophisticated and sufficiently knowledgeable with respect to financial matters that it can fend for itself in the purchase of securities and does not require the full protection of securities law.
Spin-Off: Selling off a department, or a division, of a company to make it independent company.
Spin Out: A division or subsidiary of a company that becomes an independent business. Typically, private equity investors will provide the necessary capital to allow the division to “spin out” on its own; the parent company may retain a minority stake.
Split (or Stock Split): An increase in the number of outstanding shares of a company’s stock, such that proportionate equity of each shareholder remains the same. In theory, the market price per share should drop in proportion. Usually done to make a stock with a very high per-share price more accessible to small investors. Requires approval from the board of directors and sometimes shareholders.
SPO (Secondary Public Offering): The issuance of new stock for public sale from a company that has already made its Initial Public Offering (IPO).
Squeeze-Out: Statutory provisions entitling an offeror who has acquired the support of a certain percentage of shareholders to acquire the balance of shares in the target company.
Standard Deviation: A statistical parameter: measures how much elements in a data set vary around the mean.
Staple Financing: A pre-arranged financing package that a financial advisor or investment bank offers to the potential buyer in an auction process, when putting up a company for sale.
Stapled Secondaries: A deal where a buyer purchases a secondary portfolio, agreeing at the same time to invest in the primary fund being raised by the selling general partners.
Star: An investment which is so successful that it makes up for other loss-making investments by a fund.
Start-Up: Financing provided to companies for product development and initial marketing. Companies may be in the process of being set up or may have been in business for a short time, but have not sold their product commercially. See Early Stage.
Strategic Investment: An investment that a corporation or affiliated firm makes in a young company that offers to bring something of value to the corporation itself. The aim may be to gain access to a particular product or technology that the start-up company is developing, or to support young companies that could become customers for the corporation’s products. In venture capital rounds, strategic investors typically are sometimes distinguished from financial investors—venture capitalists and others who invest primarily with the aim of generating a large return on their investment.
Stock Option: An individual’s right to purchase shares at a fixed price. Stock options are a widely used form of employee incentive and compensation. The employee is given an option to purchase its shares at a certain price (at or below the market price at the time the option is granted) for a specified period of years. Stock option is an essential tool for attracting talent to young companies.
Strike Price: See Exercise Price.
Subordinated Debt (Junior Debt): Debt that ranks lower than other loans and will be paid last in case of liquidation. Compare with Senior Debt.
Subscription Agreement: Agreement further to which one or more investors undertake to subscribe to, and whereby the competent corporate body (or the members thereof) undertakes to decide (or to vote in favour of), an upcoming issue by one or more target companies of shares, bonds, convertible bonds, warrants or other financial instruments to such investors. The agreement will set out/forth the type and amount of instruments to be issued, the representations and warranties, the indemnification in the event of misrepresentation and may also include post-closing covenants (such as further investment obligations or restrictions on the transfer of the instruments that will be acquired).
Syndicate Book: See Book.
Syndicated Loan: A very large loan in which a group of banks work together to provide funds for one borrower. There is usually one lead bank (see Lead Bank/ Bookrunner/Loan underwriter) that takes a small percentage of the loan and syndicates the rest to other banks.
Syndication: A group of venture capitalists jointly investing in an investee company.
Tag-Along Rights: If another shareholder sells his shareholding, the venture capitalist can insist that his shares are sold on the same terms to the same purchaser. Compare with Bring-Along Rights.
Takedown Schedule: The plan stated in a private equity fund’s memorandum to provide for the actual transfer of funds from the limited partners to the general partner’s control.
Target Company: The company that the offeror is considering investing in. In the context of a public-to-private dealthis company will be the listed company that an offeror is considering investing in with the objective of bringing the company back into private ownership.
Tax Transparency: A fund structure or vehicle is tax transparent when the fund itself is not liable to taxation and the investment in an underlying company is treated as if it would be a direct investment for the initial investor (the LP), who is taxed only when the investment structure distributes its gains and revenues.
Teaser: A short company presentation sent to potential investors before a sale or auction.
Technical Reserves: Technical reserves refer to the capital that insurance companies set aside to cover possible claims.
Term Sheet: A short document summarising the principal financial and other terms of a proposed investment. It is usually non-binding, but may impose some legal obligations on the investor and the company. Compare with Letter of Intent.
Terms and Conditions: The financial and management conditions under which private equity limited partnerships are structured.
Third Stage/Round: Funds provided for the major expansion of a company whose sales volume is increasing and which is breaking even or profitable.
Times Money Earned Ratio (TME): Equivalent to the distributed to paid in ratio (D/PI ratio), measuring is defined as the sum of distributions and the most recent valuation of a given investment, divided by the sum of capital invested.
TMT: Abbreviation for Technology, Media and Telecommunications sectors.
Top Quarter: Comprises funds with an IRR equal to or above the upper quartile point.
Track Record: A private equity management house’s experience, history and past performance.
Trade Sale: The sale of company shares to industrial investors.
Trade Secret: Information, such as a formula, pattern, device, or process, that is not known to the public and which gives the person possessing the information a competitive advantage. May sometimes include customer lists, marketing and/or business plans, and suppliers.
Turkey: An offering of securities that performed poorly.
Turnaround: See Rescue.
TVPI (Total Value to be Paid-In): TVPI is the sum of the DPI and the RVPI. TVPI is net of fees and carried interest.
UCITS: Acronym used in European legislation, refers to “Undertakings for Collective Investment in Transferable Securities”, for investment funds that are harmonised at EU level.
Underwriter: An investment bank which presents a share offering to potential investors. See firm commitment underwriting, best efforts underwriting.
Underwriter’s Warrants: Warrants sometimes granted to underwriters as a form of additional compensation in a public offering, typically in a smaller, higher risk offering.
Underwriting Agreement: The document in which the underwriters of a public offering commit, in a best efforts offering, to use their best efforts to sell the securities, or, in a firm commitment offering, to purchase from the issuer the securities that are the subject of the public offering.
Underwriting Discount (or Commission or Spread): The difference between the price at which underwriters buy securities from the issuer in a firm commitment public offering and the public offering price.
Unique Selling Proposition (USP): The key differentiating factor for buying your product, compared to that of a competitor.
Unsecured Debt: Loans not secured against a company’s assets.
Upper Half: Comprises funds with an IRR equal to or above median point.
Upper Quartile: The point at which 25% of all returns in a group are greater and 75% are lower.
Valuation – International Valuation Guidelines: Guidelines developed by EVCA, BVCA and AFIC (the European, British and French Private Equity and Venture Capital Associations) towards investors internationally concerning valuation methodologies. Their aim is improved transparency, so that investors are better able to monitor and evaluate the performance of their investments and to make the asset class more accessible and comprehensible to new and existing investors. The guidelines have been endorsed by more than 20 European and Non-European Associations and are consistent with IFRS and US GAAP.
Valuation Methods: The policy guidelines a management team uses to value the holdings in the fund’s portfolio. More generally, valuation is an estimate of the price of an item at a given time, based on a model and comparison with the value of similar items.
Venture Capital: Professional equity co-invested with the entrepreneur to fund an early-stage (seed and start-up) or expansion venture. Offsetting the high risk the investor takes is the expectation of higher than average return on the investment.
Venture Capitalist: The manager of private equity fund who has responsibility for the management of the fund’s investment in a particular portfolio company. In the hands-on approach (the general model for private equity investment), the venture capitalist brings in not only moneys as equity capital (ie without security/charge on assets), but also extremely valuable domain knowledge, business contacts, brand-equity, strategic advice, etc.
Venture Capital Rounds: Portfolio companies typically receive several rounds of venture capital before going public. The first round is usually smaller than subsequent rounds, and likely to involve fewer investors. Note that first-round funding does not necessarily mean that the company has received no previous outside backing. The term “first round” is still appropriate if previous backing consisted of, say, $500,000 from an angel investor. A first round typically is the first round involving participation by a venture capital firm.
Venture Philanthropy: A field of philanthropic activity where private equity/venture capital business models are applied to the non-profit and charitable sectors.
Venture Purchase of Quoted Shares: Purchase of quoted shares with the purpose of delisting the company. See delisting, public to private.
Vesting: The process by which an employee is granted full ownership of conferred rights such as stock options and warrants (which then become vested rights). Rights which have not yet been vested (unvested rights) may not be sold or traded and can be forfeited.
Vintage Year: The year of fund formation and first drawdown of capital.
Volatility: The volatility of a stock describes the extent of its variance over time. See standard deviation.
Vulture Capitalist: Negative term for an investor who smells fast money and who is not serious about investing in companies with long-term potential.
Warrant: An option to purchase stock in a company, typically exercised over an extended period.
Warranty: Statements, usually contained in a share subscription or purchase agreement, as to the existing condition of the company which, if not true, support a legal action for compensation by way of money damages.
Weighted Average Cost of Capital: Weighted average cost of capital is a discount rate used in valuation model reflecting the opportunity cost of all capital providers, weighted by their relative contribution to the company’s total capital.
White Knight: A company that makes a friendly takeover offer to a target company that is being faced with a hostile takeover from a separate party.
Write Down: A reduction in the value of an investment.
Write Off: The write down of a portfolio company’s value to zero. The value of the investment is eliminated and the return to investors is zero or negative.
Write Up: An increase in the value of an investment. An upward adjustment of an asset’s value for accounting and reporting purposes.
HEC Paris Private Equity and Venture Capital Club Blog 