A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

GLOSSARY

The legal structure used by most venture and private equity funds. The partnership is usually a fixed-life investment vehicle, and consists of a GP (the management firm, which has unlimited liability) and LPs (the investors, who have limited liability and are not involved with the day-to- day operations). The GP receives a management fee and a percentage of the profits. The LPs receive income, capital gains, and tax benefits. The GP (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 LPs and the GP. Fixed percentage paid by the LP to the GP to make an investment into a private equity vehicle, for example; 2% per annum based on commitments. This is the purchase of a business by its management, usually in co-operation with outside financiers (e.g. private equity providers). Buy-outs vary in size, scope and complexity but the key feature is that the managers acquire an equity interest in their business, sometimes a controlling stake, for a relatively modest personal investment. The existing owners sell most or usually all of their investment to the managers and their co-investors. 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 (in a mezzanine loan, equity warrants payable on exit). A mezzanine fund is a fund focusing on mezzanine financing. The amount estimated as being attributable to the investors in a private equity fund on the basis of the value of the underlying investee companies and other assets and liabilities. A legal document that provides details of an investment to potential investors. For example, a private equity fund will issue a PPM when it is raising capital from institutional investors. Also, a startup may issue a PPM when it needs growth capital.

Limited partnership

Management fee MBO (Management Buy-Out)

Mezzanine finance

Net Asset Value (NAV)

NVCA National Venture Capital Association (United States) Offering memorandum

or Private Placement Memorandum (PPM)

PEIGG The Private Equity Industry Guidelines Group

See Carried interest

Performance fee

Specialists in marketing and promoting private equity funds to institutional investors. They charge a percentage of any capital they help to raise for the fund. One of the companies in which a private equity firm has invested. Also called Investee company.

Placement agent

Portfolio company Preferred return

See Hurdle rate

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 (also called venture capital), 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 by using private equity funding. Private equity 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. These are generally private companies whose shares are not quoted on a stock exchange. The fund can take the form of either a company or an unincorporated arrangement such as a Limited Partnership.

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