PitchBook September 03, 2014
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Accelerator: a program that startups can apply to that provides funds and mentorship, most times for a chunk of equity, in an effort to help the company grow. Most accelerators are geared towards helping early-stage companies.
Accredited Investor: a category of investors who are deemed sophisticated and meet certain net worth requirements outlined by the SEC. These investors have less need for the protection provided by registration under securities laws.
Add-on/bolt-on: a private equity transaction where the acquired company is “added on” to an existing portfolio company. In add-on deals, the acquiring company is called the “platform” and the private equity firm is referred to as the “sponsor.” (Bolt-on is often the preferred term in Europe.)
Advisory Fee: see Monitoring Fee.
Alternative Investment: a broad term for untraditional assets such as private equity, venture capital, hedge funds and real estate.
Anchor tenant: the first limited partner to commit to a fund.
Angel: an individual who makes direct investments into early stage businesses. Due to the nascent characteristics of these companies, angel investing is a high-risk, high-reward endeavor.
Asset Allocation: describes the general mix of investments in a portfolio, determined by investing timeframe, risk tolerance and overall goals.
Asset-based Lending: any form of lending to a business that is collateralized or secured by a balance sheet asset. Pledged assets may include inventory, equipment and accounts receivable, among others, that will be redeemed in the event of default by the debtor.
Benchmarking: the process of comparing the returns of a portfolio against a group of its peers.
Board of Directors: a group of individuals selected to represent stockholders with regard to company policies or significant company decisions. PE or VC investors will often place executives on the Board of a portfolio company as part of an investment.
Book Runner: the main entity responsible for the issuance of new equity, debt, and other securities.
Break-Up Fee: a fee paid by the seller if it breaches or decides to terminate a definitive acquisition agreement.
Bridge Loan: a temporary, limited amount of financing that serves as a “bridge” until a long-term debt or equity investment can be secured.
Brownfield: an investment in an existing asset, land or structure that typically requires repairs, upgrades and expansion.
Burn rate: a time-based metric reflecting how quickly a startup spends its operating capital/shareholder equity. Burn rates are typically calculated over annual or monthly periods, and in extreme cases can be calculated on a weekly or daily basis.
Business Development Company (BDC): a closed-end investment company created to invest in both the debt and equity of small and medium-sized businesses; investments can be made in both public or private entities. While similar to VC funds, many BDCs are actually publicly traded and allow for smaller, non-accredited investors to back startups via purchased shares in the BDCs directly investing in said entities.
Buyout: a private equity transaction in which a firm acquires all or a significant amount of equity in a business. Buyouts typically involve a mixture of cash and debt, which has led to the term “leveraged buyout.”
Capital Call: the act of a private equity fund “calling down” previously pledged capital from its limited partners in order to execute an investment.
Capital Overhang: the current amount of capital available to private equity investors.
Carried Interest: a general partner’s share of the capital gains from a fund, generally 20%. Most limited partnerships include a provision that allows the general partner to receive carry only after the limited partners have achieved a preferential rate of return on their original commitment.
Carveout: a transaction in which a parent company sells all or part of a subsidiary, division or other portion of its operations.
Chapter 11: the section of the Bankruptcy Code that outlines the process for asset reorganization.
Chapter 7: the section of the Bankruptcy Code that outlines the process for asset liquidation.
Closed Fund: a private equity fund that has finished taking commitments from limited partners and held its “final close.”
Co-Investment: a direct investment from a limited partner into a portfolio company executed in conjunction with the general partner.
Convertible Debt: debt that can be converted to equity based on certain conditions, typically a pre-defined valuation or date. Convertible debt usually includes compensation, most likely warrants or discounts, in addition to the round amount.
Corporate Acquisition: the purchase of a portfolio company by a corporation for strategic purposes.
Corporate Venture Capital: corporations can have a venture capital team that looks to invest in companies that may align with the parent company’s goals. Often times these investments lead to partnerships between the investor and the company raising money.
Club Deal: a private equity transaction involving two or more firms.
Crowdfunding: the process of funding a venture by raising small amounts of capital from a large number of people (the crowd), usually through an online platform.
Data Room: a secure, digital location where potential investors can review confidential information on a target company, including financial statements, compensation agreements, intellectual property and client contracts.
Deal Flow: a measure of the volume of private equity transactions that have closed in a given period.
Disbursement: investments made by private equity funds into their portfolio companies.
Distressed Investment: a debt or equity investment into a company experiencing liquidity, capitalization, and/or underperformance issues.
Distributed to Paid-In (DPI): money returned (distributions) to limited partners divided by money paid in to the partnership. Also called cash-on-cash multiple.
Distribution: the act of returning capital back to limited partners following a liquidity event.
Dividend Recapitalization: a specialized type of recapitalization in which a portfolio company takes on new debt in order to issue distributions to the owners.
Dragon: a single investment that returns the entire value of the fund.
Drawdown Rate: the speed with which a general partner calls down the capital previously committed by its limited partners.
Dry Powder: see Capital Overhang.
Due Diligence: the process of vetting, analyzing and assessing individuals and institutions prior to engaging in a transaction.
Early Stage: a period of venture capital investment in-between seed and late stage deals that includes Series A and Series B financings. These companies typically have a proven concept and little revenue.
Earnout Provisions: part of a contract that details future compensation for the seller if the business attains certain performance goals.
EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization): a cash flow measurement that takes revenue less expenses without including interest, taxes, depreciation and amortization.
Enterprise Value: a measure of a company’s value calculated as market capitalization, including all debt and equity interests, minus excess cash.
Evergreen Fund: a private equity fund that continually fundraises and never holds a final close in order to ensure consistent cash flows.
Exit: the sale of a portfolio company by a private equity firm. Exits can be either full or partial. Common strategies include corporate acquisitions, secondary buyouts and IPOs. Also called a Liquidity Event.
Family Office: a firm that manages assets, investments and trusts for a wealthy family.
Final Close: the end of a general partner’s fundraising efforts for a particular fund.
Fund: an investment vehicle comprising capital commitments from limited partners, which are raised by a general partner. Funds typically have specific sectors, regions and deal amounts that they target for their investments.
Fund-of-Funds: a fund that invests in private equity funds, allowing small institutions and individuals to gain private equity exposure. A fund-of-funds devotes all of its time to evaluating general partners, which generally leads to above-average returns. However, there are extra fees and expenses associated with investing in a fund-of-funds.
Fundraising: the process by which a general partner seeks capital commitments from limited partners.
General Partner (GP): the entity in a limited partnership that maintains responsibility for all debts and obligations. The GP manages all aspects of the fund, including investment decisions, and earns a management fee and percentage of the carried interest (assuming the fund is successful).
Greenfield: an investment involving an asset or structure that does not yet exist. In a greenfield investment, investors fund all stages of development, including design, construction, infrastructure, and operations.
Growth Equity Investment: a growth equity investment provides relatively mature companies with capital to fund expansion or restructuring in exchange for an equity position, typically a minority stake. As opposed to a buyout, growth equity investors do not take control of the business.
Hurdle Rates: a pre-established minimum rate of return that general partners must achieve before they are allowed to claim carried interest.
Incubator: an institution to host and develop startup companies. An incubator provides early-stage startup companies with office space, resources, advice and networking opportunities. In return, the incubator generally receives an equity stake in the company.
Initial Public Offering (IPO): the initial offering of publicly available stock by a private company. All companies undergoing an IPO must register with the SEC and take the necessary steps to comply with all applicable rules and regulations.
Institutional Investor: dedicated financial entities that invest on the behalf of companies and individuals. Examples include university endowments, insurance companies and pension funds.
Interim Close: funds that are currently raising capital may have a series of interim closes as limited partners make commitments. Investing can begin as soon as the fund holds its first interim close.
Internal Rate of Return (IRR): the rate at which the net present value of all the cash flows from an investment will equal zero. IRR is a widely used metric to gauge fund performance over time.
Investment Bank: a financial institution that serves as an agent or underwriter for security issuances. Additionally, some investment banks act as broker/dealers and provide advisory services for mergers, acquisitions, restructurings and other transactions.
J-Curve: a common trend in the private equity industry where fund performance and cash flows are negative in early stages due to capital expenditures and other expenses, but rise over time as results are produced. The phenomenon causes a “J-curve” when looking at a chart of the fund’s performance, with a slight dip at the onset followed by steady growth.
Key Man Provisions: part of a limited partnership agreement that prohibits investments by the general partner if certain key executives are no longer involved in the fund barring approval from limited partners.
Key Performance Indicators (KPIs): a set of measures that can be used to gauge the performance and state of a given business or sector. KPIs can include revenue growth measures, monthly active user growth rates for certain technology firms or leverage ratios, among many others. Depending on a given business’s strategic and operational initiatives, KPIs hold different priorities.
Late Stage: the final stage of venture capital investing involving companies that have achieved strong revenue growth and are near exit. As late stage investments are less risky, the rate of return is typically lower. Rounds Series C and later are typically categorized at late stage.
Lead Investor: the entity or individual that makes the largest investment in a given venture capital round. As the primary financier for the round, the lead investor determines the current valuation of the company.
Leverage: the use of debt in an investment, including the acquisition and capital expenditures. Through leverage, general partners are able to expedite improvements at portfolio companies and amplify returns.
Leveraged Buyout (LBO): see Buyout.
Limited Partner (LP): an investor, usually an institution or accredited investor, that contributes capital to a private equity limited partnership.
Limited Partnership: legal term for the relationship between a general partner and its various limited partners.
Liquidation: the process of selling assets in order to pay creditors (and potentially shareholders).
Liquidity Event: the process of selling equity in an investment in order to realize and investment and return capital to limited partners.
Management Buyout (MBO): a buyout that is led or participated in by the company’s management team.
Management Fee: a fee charged by general partners to limited partners in a fund that typically ranges from 0.5% to 3% of the called capital. Ostensibly, the fees are used to pay for the day-to-day operations of the fund.
Merger: a combination of two or more companies, often similar in size. This differs from an acquisition in important ways: Mergers are usually friendly, mutual decisions, whereas acquisitions can often be hostile and unsolicited. Additionally, mergers are often paid for or arranged using stock or other securities, as opposed to cash transactions that characterize most acquisition offers.
Mezzanine Investment: financing round in-between senior and subordinated loans that typically includes equity-based options in the form of warrants.
Middle Market: broadly defined as companies with an enterprise value of $25 million to $1 billion.
Monitoring Fee: a fee, usually tied to EBITDA performance, charged by private equity firms to their portfolio companies for advisory and management services.
Multiple Arbitrage: investment gains achieved by increasing the sales multiple relative to the original investment multiple. i.e. buying a company at 4x EBITDA and selling at 7x EBITDA.
Operating Partner: an executive dedicated to working with portfolio companies to increase their value. They often have a specific expertise, for example an industry focus, such as healthcare.
Paid-In Capital: the amount of committed capital that has been transferred from the limited partner to the general partner.
Placement Agent: a third-party firm that identifies potential investors for private equity funds or other securities.
Platform Company: a private equity-backed company that completes an add-on acquisition.
Portfolio Company: a company that has received an equity investment from a private equity firm.
Pre-/post-money valuation: pre-money valuation refers to the value investors place on the company before they add their capital; post-money valuation is how much the company is valued at after the capital infusion. Most references are to a company's post-money valuation, or post val. Pre vals can be determined by subtracting the investment amount from the post val.
Pre-seed: the stage before the seed stage. As seed-stage investing has become more popular, investors have started to look to invest in these types of companies in hopes of finding them early on. A pre-seed company is often just the founder(s) and an idea.
Private Investment in Public Equity (PIPE): an investment in stock of a publicly traded company made by a private investor, typically at a discount to the current market price.
Private IPO: a term coined to define the venture rounds in which private companies have taken-on large amounts of capital at high valuation during the time they would have normally gone through a public offering.
Public market equivalent: a set method of analysis that is used to evaluate private fund performance against a public benchmark or index.
Public-to-Private Transaction: a buyout of all the shares of a publicly traded company, effectively changing the company’s status from public to private.
Quartile Ranking: a system of ranking funds based on performance. The top one-quarter of performers are in the upper quartile, and so on.
Recapitalization: a restructuring of a company’s debt and equity mixture often used as an investment strategy in private equity.
Remaining Value to Paid-In (RVPI): the value of a fund’s unrealized investments divided by money paid-in to the partnership
Return on Investment (ROI): the profit or loss resulting from an investment transaction as a percentage of the original investment, usually expressed on an annualized basis.
Reverse Merger/Takeover: a transaction in which a private company acquires a publicly traded company in order to forgo the IPO process.
Reverse Termination Fee: a fee paid by the buyer if it breaches or decides to terminate a definitive acquisition agreement.
Road Show: the process of presenting financial opportunities to potential investors in numerous cities. The road show is a common aspect of private equity fundraising and the IPO process.
Secondary Market: a market that facilitates the sale of private equity assets from one limited partner to another. Limited partners often sell some or all of the private equity holdings for a variety of reasons, including raising cash and adjusting their asset allocation.
Seed Capital: the earliest stage of venture capital. Typically, smaller amounts are invested in seed rounds for startups, but that does not necessarily mean smaller stakes.
Senior Debt: debt that takes priority over other securities in the event of liquidation.
Separate Account: a customized private equity fund created for a single entity. Currently rising in popularity, separate accounts are utilized by the largest limited partners to mitigate fees and gain deeper involvement with the investing process.
Series A – D+: venture rounds that typically occur around certain milestones: a Series A round is raised after a seed investment has taken a company as far as it can go; a Series B may be when the company is reaching close to profitability but needs capital for hiring/development needs; Series C and D+ rounds are commonly known as late-stage rounds, and generally fall into the time when a company has a defined business model that has taken hold, is making significant revenues and is looking to expand at a large scale.
Sharing economy: an economic model in which individuals borrow or rent assets owned by other individuals, rather than businesses. This model is normally employed when assets are underutilized (e.g. cars, apartments, parking spaces).
Sovereign Wealth Fund: a state-owned investment fund designed to protect and/or grow a range of financial assets, such as stocks, bonds and natural resources.
Staple financing: a pre-arranged financing package offered to potential acquirers that includes all the details of a lending package. This name derives from the simple fact that the financing details are stapled to the back of the acquisition term sheet.
Step-up multiple: a term used to define the difference in the post-valuation of a company’s previous VC round and the pre-money valuation of its new round.
Strategic Acquisition: an investment made by a corporation in order to access new technology, products or services, as opposed to a financial transaction.
Subordinated Debt: loans that have a lower priority than senior debt in the event of liquidation.
Total Value to Paid-In (TVPI): money returned to limited partners plus the fund’s unrealized investments, divided by money paid-in to the partnership — TVPI should equal RVPI plus DPI. Also called “investment multiple” or MOIC.
Tranche: a portion of an investment more commonly seen/used in venture rounds. In many agreements (especially in healthcare), a second portion/tranche of a round is made upon specified milestones, such as regulatory approval. Every tranche of a round will be part of the same round.
Transaction Fees: sometimes referred to as deal fees, transaction fees are charged by a private equity firm to the companies they acquire and typically range between 1% and 2%.
Trust economy (social trust economy): a confluence of social and technological trends uniting to form the foundation of a new value system.
Underwriting: the issuance of debt and equity securities by investment bankers on the behalf corporations and governments in order to generate investment capital.
Unicorn: in the VC industry, unicorns (a term credited to Aileen Lee of Cowboy Ventures) refer to startups that reach valuations of at least $1 billion, through either private or public investment.
Venture Capital: a type of private equity that focuses on investments in startup and early stage companies with long-term, high-growth potential.
Vintage Year: indicates the year that a fund held its final close and/or began making investments.
Warrant: a security that provides the holder with the option to purchase a company’s stock at a predetermined price for a specified period.
Zombie Fund: a fund that has invested all of its committed capital and continues to collect management fees despite little or no hope of achieving higher returns for investors. Many so-called zombie funds hold portfolio investments for several years past their predetermined investing period to continue garnering their management fee.