A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

GLOSSARY

Fund raising The process in which venture capitalists themselves raise money to create an investment fund. These funds are raised from private, corporate or institutional investors, who make commitments to the fund which will be invested by the GP. GAAP Generally Accepted Accounting Principles (GAAP) is the term

used to refer to the standard framework of guidelines for financial accounting used in any given jurisdiction. GAAP includes the standards, conventions, and rules accountants follow in recording and summarising transactions and in the preparation of financial statements.

General Partner (GP) A partner in a private equity management company who has unlimited personal liability for the debts and obligations of the limited partnership and the right to participate in its management. The General Partner earns a management fee and a percentage of gains (carried interest). Hurdle rate A return ceiling that a private equity fund management company needs to return to the fund’s investors in addition to the repayment of their initial commitment, before the GP becomes entitled to carried interest payments from the fund. The term “preferred return” is often used as equivalent. IFRS International Financial Reporting Standards (IFRS) are standards, interpretations and the framework adopted by the International Accounting Standards Board (IASB). ILPA Institutional Limited Partners Association In a private equity fund, the net return earned by investors from the fund’s activity from inception to a stated date. The IRR is calculated as an effective compounded rate of return, using monthly cash flows and annual valuations. This is the most appropriate performance benchmark for private equity investments. Shares in a company that have been placed on a stock exchange. An IPO is always just the first time a company’s shares are listed - if a company has a listing on another market or in another country, then the listing is not an IPO, merely a secondary, or additional listing. IPEV International Private Equity and Venture Capital association 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. Later stage Expansion, replacement capital and buyout stages of investment. LBO (leveraged buyout) A buyout in which the NewCo’s capital structure incorporates a particularly high level of debt, much of which is normally secured against the company’s assets. Lead investor The venture capital investor that makes the largest investment in a financing round and manages the documentation and closing of that round. The lead investor sets the price per share of the financing round, thereby determining the valuation of the company. Leverage The use of debt to acquire assets, build operations and increase revenues Limited Partner (LP) An investor in a limited partnership/private equity fund. The General Partner is liable for the actions of the partnership while the Limited Partners are generally protected from legal actions and any losses beyond their original investment. The Limited Partner receives income, capital gains and tax benefits. Initial Public Offering (IPO)

Internal Rate of Return (IRR)

A thorough understanding of PE | page 93