Center For Private Equity And Venture Capital

Blue Sky LawsA common term that refers to laws passed by various states to protect the public against securities fraud. The term originated when a judge ruled that a stock had as much value as a patch of blue sky. Balance SheetA condensed financial private equity glossary statement showing the nature and amount of a company’s assets, liabilities, and capital on a given date. Average Company FinancingThe dollar value of total capital invested divided by the total number of investee firms in a given period.

An assessment on the amount of debt a company can service and pay back over a certain period. A type of debt instrument that can be converted into equity or cash. In active co-investing the LP is invited early on to join forces with a PE fund and shares in the work, cost and risk of a not yet completed transaction. In the context of PE, funds have a finite lifespan with no redemption prior to the expiration of the fund. Sliding fee scale– A management fee that varies over the life of a partnership. Acquisition– The process of taking over a controlling interest in another company. Acquisition also describes any deal where the bidder ends up with 50 per cent or more of the company taken over. It may use a significant amount of borrowed capital to meet the cost of acquisition. Seed Funding provided before the investee company has started mass production/distribution with the aim to complete research, product definition or product design, also including market tests and creating prototypes.

Financial Distress

Accrued InterestThe interest due on preferred stock or a bond since the last interest payment was made. Venture capitalists do not usually get involved in the running of the startup – they are very much hands-off. They are rarely interested in making an outright purchase of a company. Venture capitalists invest in startups – they buy in for an agreed amount of money in the hope of seeing their investment grow.
private equity glossary
A single-family office generally requires a minimum wealth of between $300- and $600-million in assets in order to justify the cost of staffing, software, and maintaining a physical location. Dry powder, when associated with private capital, refers to capital that has been committed but not yet allocated. Funds will sometimes hold cash on hand in order to quickly take advantage of investment opportunities during volatile markets. Also known as stock or equity dilution, is when a company issues new stock, reducing existing stockholders’ ownership percentage of the company. Dilution is one way a company can raise additional funds, though it often depresses stock prices. Most people who are not familiar with private equity and investing will probably be relieved to learn that crowdfunding means the same in private equity as it does to the rest of the public. Related to Alpha, beta is the measurement of asset movement to stock market increases and decreases. It’s useful for comparing the contribution of an individual asset to market portfolio risk.

A Beginners Glossary Of Venture Capital

The need for a bridge loan arises when a company runs out of cash before it can obtain more capital investment through long-term debt or equity. A periodic payment by investors in a fund to the fund’s manager for investment and portfolio management services. In the investment stage of the fund, the fee is usually based on the capital commitment. As the fund matures, the fee is then based on the assets under management. The purpose of these vehicles is to give the investor in the fund-of-funds more opportunity and diversity in private equity investments. An additional investment in a portfolio company which has already received funding. In the case of a venture capital fund, there may be several rounds of follow-on investing.
private equity glossary
Residual value is the market value of the remaining equity that the limited partners have in the fund. It is common to see a private equity investment’s net asset value, or NAV, referred to as its residual value, since it represents the value of all investments remaining in the fund portfolio. Private equity investors compare their fair value with the residual value of the investment’s purchase price; any difference represents the potential or unrealized profit or loss from the sale of the shares. Initial Public Offering The sale or distribution of the privately-held stock of a Portfolio Company on public markets for the first time.

A legal structure used by most venture and private equity funds that usually consists of sell eth a general partner and limited partners. Specified investingInvestment in individually specified properties or portfolios, or investment in commingled funds whose real estate assets are fully or partially specified prior to the commitment of investor capital. Real AssetsReal assets are often defined as physical or tangible assets that have intrinsic value and tend to provide a “real return”, often linked to inflation. This definition encompasses a wide range of investments, including real estate, infrastructure, timberlands, agrilands, commodities, precious metals and natural resources. Real assets also appeal to investors because of their low correlation to traditional stocks and bonds.

  • Top-down analysis might start with a consideration of global economic growth, then proceed to examination of growth prospects of individual countries, then analyze industries, then select individual companies for investment.
  • When the market price of a security is thought to be more than its underlying value, it is said to be ‘trading at a premium’.
  • U.S. high-yield industrial bonds are high-yield bonds issued by companies that manufacture or distribute goods, and that are domiciled in the U.S.
  • Piggyback – Company is registering stock either for itself or other stockholders and one can “piggyback” a portion of shares for registration onto the company’s registration.
  • This document includes operational and financial information about the company, the management and the purpose of the offering.

Principals will typically sit on a few boards of the fund’s portfolio companies and will help scout out opportunities for these companies to be acquired. The Principal position is typically the next rung on the ladder to Partner status. A private advisory firm that typically manages the wealth, taxes, and estate planning of ultra-high net worth investors (i.e. individuals or families with more than $100 million in investable assets). Institutional investors who deploy capital into private, early-stage technology companies. Venture Capitalists are usually the next group of investors to commit capital after Seed Investors. A tax matters partner is a person in a partnership designated to receive tax notifications from the Internal Revenue Service and is given the authority to enter into tax agreements on the behalf of the partnership. Regulation D Rule 505, like Rule 504, is governed by Section 3 of the Securities Act. It is a safe harbor provision for offerings that will not exceed five million dollars. Because of the benefits that are offered under Rule 506, this exemption is rarely relied upon, except as a backup exemption.

Credit Market

Expansionary policies by monetary authorities aim to expand money supply and boost economic activity, mainly by keeping interest rates low to encourage borrowing by companies, individuals and banks. The difference between a security or portfolio’s return and the relevant benchmark’s return. The EEA provides for the free movement of persons, goods, services and capital within specific countries. It is influenced by many factors including household, government and business spending, trade, technology and central bank policy.

Asset turnoverCalculated as total revenues for the trailing 12 months divided by the average total assets. ArbitrageBuying securities in one market and then selling them immediately in another market to make a profit on the price discrepancy. AmortizationThe liquidation of a financial debt through regular periodic installment payments. For tax purposes, the periodic deduction of capitalized expenses such as organization costs. Pro rata is from the Latin ‘in proportion.’ A VC with supra pro rata rights gives him or her the option of increasing his or her ownership of a company in subsequent rounds of funding. The process of dissolving a company by selling off all of its assets . A reference to the beginning of a venture, or the earliest point of a startup. Entrepreneurs raise capital to start a company and continue raising capital to grow the company. A company is bootstrapped when it is funded by an entrepreneur’s personal resources or the company’s own revenue.

Diligence Terms

Entrepreneurs and investors agree to place a cap on the valuation of the company where notes turn to equity. This means investors will own a certain percentage of a company relative to that cap when the company raises another round of funding. Uncapped rounds are generally more favorable to an entrepreneur/startup. The sale or exchange of a significant amount of company ownership for cash, debt, or equity of another company. There are myriad types of debt financing, from simple commercial loans to bridge/swing loans in which a lender makes a short-term loan in anticipation of equity financing at a later stage in the development of a business. A sub category of asset class that more specifically defines what types of investing that fund does within that asset class. The strategy can focus on specific industries, size of investment, size of target companies, etc. In this market, limited partners sell both their existing assets and their unfunded commitment in a fund. An investment strategy that involving properties that often need a high degree of improvement and generally include investments in development, raw land and niche property sectors. The most aggressive, involving a high-risk, high-return potential strategy.
private equity glossary
Back in 2010 when I did my first deal, Vendor DD was still a bit special, but now in 2020, it’s very normal. I highly recommend it because it puts you, not the PE firm, in control. Strategic buyers are revered because they can, and often do, pay more for a business that PE can because they are buying for a strategic reason, rather than a purely financial reason. An advisor will never go so far as to say that an business is a good or bad investment opportunity.
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The broader definition includes various kinds of longer-term, less liquid bank deposits. The ability to buy or sell a particular security or asset in the market. Assets that can be easily traded in the market are referred to as ‘liquid’. The rate at which the prices of goods and services are rising in an economy. For example, shares with a high market capitalisation are typically liquid as there are often a large number of willing buyers and sellers in the market. A strategy where a portfolio holds a select number of stocks that represent the portfolio manager’s best opportunities for outperformance. Fewer holdings mean each stock has a larger impact on under/outperformance.
private equity glossary
The capital account concept is very important in hedge fund, particularly in calculating incentive compensation. The incentive compensation paid to a hedge fund manager is not a true “fee,” but an allocation from a limited partner’s capital account to the capital account of the hedge fund manager. This structure affects the tax attributes of the incentive compensation. Deal teams, in private equity firms, are the part of the organization tasked with leading the research and acquisition of new portfolio companies. Internal rate of return A discounted cash-flow analysis calculation used to determine the potential total return of a real estate asset during an anticipated holding period. Money provided by venture capital firms to small, high-risk, startup companies with major growth potential. This is when a company borrows money with the intent that the debt accrued will later be converted to equity in the company at a later valuation. This allows companies to delay valuation while raising funding in it’s early stages. This is typically done in the early stages of a company’s life, when a valuation is more difficult to complete and investing carries higher risk. Venture Capital refers to a form of private equity and financing that small companies and small businesses are provided with by investors.

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