Topic 2: Private Equity

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Blind-pool investment

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Buyout funds

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It relates to capital provided as a mix of debt and equity to acquire from current shareholders an established business, business unit, or company (generally privately held or a spin-off from a large private or public company)

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Capital calls or drawdowns

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Carried interest

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Cash flow J-curve

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Co-investment

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Commitments

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Contractually limited life

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Distributions

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Early stage

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This stage is split into seed and start-up stages. The seed stage takes place before a company is set up and any new product is sold. The financing provided is used to fund research, to assess an initial concept, and to develop a new product.

Once successful, further financing is provided during the start-up stage to establish the company and begin to market its new product.

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Expansion stage or development capital stage

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A company in this stage, which may or may not have reached
profitability, has already established the technology and market for its new product. The financing provided is used to allow greater or more rapid growth by increasing production capacity, developing markets or products, or providing additional working capital.

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Fund-raising cycle

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There is a private equity fund-raising cycle that begins anew each time the
general partners need to raise capital for another fund. Typically, limited partnership
agreements do not allow follow-on funds by the same manager before the end of the
initial fund's investment period or until a large part of the initial fund has been invested.

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General partner (GP)

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Investment professionals, such as venture capitalists or buyout managers, manage these funds.

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Going direct

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Eschews PE funds altogether, as the PE fund investment program makes direct investments into a portfolio company, similar to a co-investment but without the input of a PE fund manager.

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Hurdle rate or preferred return

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Investment period

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J-curve

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Limited partner (LP)

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pool money to invest in privately held companies.

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Limited partnership structure

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Limiting liability

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investors' liabilities are limited to the capital committed to the fund

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Management fees

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Depends on the size of the fund, generally ranging from 2.5% of
committed capital for small funds to 1.5% for larger funds. The fees are often based on
the amount of committed capital during the investment period and on the value of the
portfolio thereafter. There are considerable differences from one fund to the next
regarding directorship fees or transaction costs.

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Mezzanine funds

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It relates to capital provided through the issuance of subordinated debt,
with warrants or conversion rights to finance the expansion or transition capital for
established companies (usually privately held, below investment grade, or both).
Mezzanine financing is halfway between equity and secured debt. While mezzanine
financing gives a more predictable cash flow profile, it is unlikely to provide capital
returns comparable to other private equity financing forms.

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Net asset value (NAV) J-curve

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Realizations or exits

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Replacement capital or secondary
purchase

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This strategy relates to capital provided to acquire existing shares in a company from another PE investment
organization.

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Rescue or turnaround

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Under this strategy, capital is provided to help
established companies recover profitability after experiencing trading, financial,
operational, or other difficulties.

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Secondary transactions

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From a strictly legal standpoint, limited
partnership shares are illiquid; in practice, however, secondary transactions occasionally take place, in which investors sell their shares before the termination of the
fund.

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Venture capital (VC) funds

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It relates to equity co-invested with entrepreneurs to fund their young and potentially fast-growing companies and is often active in technology
sectors such as telecommunications, life sciences, and clean technology.

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Vintage year

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As with wine, the fund will have a vintage year, that is, the year in which the first capital is drawn down from investors to be invested in a company