Welcome to our comprehensive private equity glossary – an A-to-Z guide that demystifies common PE jargon, acronyms, and crossover finance terms. This glossary of private equity terms explained is written in a conversational yet professional tone to be accessible for beginners and useful for seasoned professionals alike. From venture capital slang to mergers & acquisitions lingo, we’ll explain PE terminology in clear language, often with context or examples. Let’s dive into the key private equity terms from A to Z.
Accredited Investor: An individual or entity that meets certain financial criteria (wealth or income) qualifying them to invest in private investments not available to the general public. For example, U.S. securities laws define an accredited investor as a person with net worth over $1 million (excluding primary residence) or high annual income. Being accredited allows one to invest in private equity funds, hedge funds, and other alternative assets that are generally deemed higher risk.
Add-on Acquisition (Bolt-on Acquisition): The purchase of a smaller company by a private equity firm’s existing portfolio company (the “platform”) to fuel growth. An add-on helps expand the platform’s product lines, customer base, or geographic reach. In practice, PE firms use add-ons to “buy and build” – e.g. a platform company acquires a competitor to increase market share. This strategy can create value through synergies and scale.
Alternative Assets / Alternative Investments: A broad class of investments outside the traditional stocks, bonds, and cash. Alternative assets include private equity, venture capital, hedge funds, real estate, commodities, and more. They are generally less liquid and higher risk than traditional investments, but can offer higher returns. Private equity is itself an alternative investment category focused on buying ownership in private companies.
Assets Under Management (AUM): The total market value of assets that an investment manager or fund is managing on behalf of investors. For a private equity firm, AUM includes all the capital it has raised across its funds (plus any appreciation) that it oversees. In other words, AUM is the size of the money pot a PE firm has available to invest. A firm’s AUM is often used as a measure of its scale and success.
Amortization: In a finance context, amortization refers to spreading out a cost or value over time. In private equity, you might encounter amortization in two ways: (1) Loan amortization – paying down debt principal over time on a schedule, and (2) Asset amortization – expensing the cost of an intangible asset over its useful life. For example, if a PE-backed company buys a patent, it might amortize that cost over X years on the income statement.
Blind Pool: A type of investment fund (often a PE or VC fund) where the specific investments to be made are not known in advance by investors. Investors commit capital to the fund trusting the fund manager’s strategy, essentially giving a “blank check.” Blind pool funds give GPs flexibility, but require LPs to have confidence in the manager since they commit money without seeing exactly what companies will be bought.
Bridge Loan (Bridge Financing): A short-term loan intended to “bridge” a gap until longer-term financing is obtained or an event occurs. In PE or M&A deals, a bridge loan might fund an acquisition temporarily until a more permanent capital structure (like a bond issuance or equity raise) is put in place. Bridge financing often comes with higher interest rates due to its interim, last-resort nature.
Buyout: The acquisition of a controlling interest in a company. In private equity, buyout usually refers to a leveraged buyout (LBO), where a PE fund buys a company using a combination of equity and a significant amount of debt. A buyout occurs when the buyer (often a PE firm) sees an opportunity to improve the company’s value and later sell it at a profit or take it public. For example, a PE firm might do a buyout of a family-owned business when the owners retire.
Buy-and-Build Strategy: See Add-on Acquisition. (Buy-and-build is a strategy where a PE firm uses a platform company to make multiple add-on acquisitions and consolidate an industry.)
Carried Interest (Carry): The share of profits that a private equity fund’s managers (the GPs) earn if the fund performs well. Carry is essentially the performance fee for the fund manager. It is typically 20% of the fund’s profit (after returning investors’ capital and often a minimum hurdle return). For example, if a PE fund sells a company and realizes a $100 million gain (after returning invested capital), the PE firm might keep $20 million as carried interest. This incentivizes GPs to maximize returns. (Note: Carried interest is often taxed as capital gains, which has been a point of debate in tax policy.)
Catch-Up: A term in fund economics referring to a stage in the distribution waterfall where the general partner “catches up” on profits after the limited partners have received their preferred return. In a typical waterfall, after the hurdle rate is met for LPs, distributions go to the GP until the agreed split (e.g. 20% carry) is reached – this GP catch-up provision ensures the GP gets its full share of profits. In simpler terms, catch-up is the phase where the PE firm starts to receive most or all of the next dollars of profit until it has received 20% of total profits, aligning the final profit split to 80/20 (LP/GP).
Clawback: A provision that allows investors to “claw back” (recoup) some carried interest from the GP under certain conditions. It ensures the GP does not keep excessive carry if early profits turn to losses later. For example, if a GP took performance fees on early exits but later deals lost money such that the fund overall fell below the hurdle return, a clawback forces the GP to return enough carry to make the LPs whole. This protects LPs from the timing of exits – the GP only ultimately keeps carry if the fund as a whole was successful.
Co-Investment: When an investor (often an LP in the fund) invests directly into a specific deal alongside the private equity fund. A co-investment lets a large LP put extra money into an attractive portfolio company beyond their fund commitment, usually with no additional fees. For instance, if a PE fund is buying a business and one of its pension fund investors wants more exposure, they may co-invest a portion of the equity directly. Co-investments are typically offered to sizable, trusted LPs and are done on the same terms as the main fund’s investment.
Committed Capital: The total amount of money that investors (LPs) pledge to a private equity fund. This commitmentis not all given to the fund upfront, but can be drawn down over time as investments are made. For example, a limited partner might commit $10 million to a new PE fund; the fund will call this capital as needed (via capital calls). The sum of all LP commitments equals the fund’s total committed capital, which the GP has available to invest.
Commitment Period (Investment Period): The period during which a PE fund is actively making new investments (and thus calling committed capital). This is usually the first few years of a fund (typically 3–5 years of a 10-year fund life). During the commitment period, the GP can draw on LPs’ committed capital to fund acquisitions. After this period, any remaining capital is usually reserved for follow-on investments or expenses, and new investments generally cease.
Continuation Fund: A newer phenomenon in which a PE firm creates a new fund vehicle to take over (buy) one or more portfolio companies from an older fund. A continuation fund extends the holding period of those assets, often to allow more time to realize value. It’s essentially the GP selling an asset from Fund I to Fund II (the continuation vehicle) often with some existing LPs “rolling over” and new investors coming in. Continuation funds have become common as part of GP-led secondary transactions, giving LPs the option to cash out or continue in a reorganized fund.
Covenant: A binding agreement or clause in debt financing that the borrower (portfolio company) must adhere to. Common covenants in leveraged buyouts include maintaining certain financial ratios (like Debt/EBITDA under a threshold) or restrictions on additional debt. Breaching a covenant can trigger a default. Covenant-lite loans are loans with fewer or more lenient covenants, often seen in frothy credit markets.
Credit Fund (Debt Fund): A fund that specializes in debt investments rather than equity. In private markets, private credit funds (or debt funds) provide loans or purchase debt (bonds, notes) of companies, including those owned by PE firms. These funds aim to earn returns through interest and debt repayments. Many PE firms also manage credit funds to provide financing for leveraged buyouts or to invest in distressed debt.
Data Room: A secure repository of documents shared during due diligence in a deal. In a company sale process, the seller populates a virtual data room with financial statements, contracts, and other confidential information for potential buyers (like PE firms) to review. Data rooms are typically online and require NDAs to access, ensuring sensitive data is only seen by authorized parties evaluating the investment.
Distressed Debt: Debt of companies that are in financial trouble or bankruptcy. Distressed debt investing involves buying these bonds or loans at deep discounts with the strategy of profiting if the company recovers or through restructuring processes. Some PE firms have distressed or turnaround strategies, effectively doing buyouts of troubled companies through purchasing their debt and converting to equity.
Distributed to Paid-In (DPI) Multiple: A key fund performance metric also called the realization multiple. DPI measures how much cash a fund has returned to investors relative to the amount they paid in. It’s calculated as cumulative distributions ÷ paid-in capital. For example, a DPI of 0.5x means the fund has so far returned half of the investors’ contributed capital. A DPI above 1.0x means the fund has returned more cash than called. Importantly, DPI doesn’t count remaining unrealized investments – it’s purely what’s been realized (cash-on-cash to date).
Distribution: In private equity, a distribution is a payment made from the fund to the investors (LPs). Distributions usually occur when a portfolio company is sold or recapitalized, and the proceeds (profits and return of capital) are then passed to LPs. Distributions can be in cash or sometimes in stock (if a company is taken public, LPs might get shares). The timing and sequence of distributions relative to contributions are governed by the fund’s distribution waterfall.
Distribution Waterfall: The agreed sequence outlining how returns from a fund are split between LPs and GP. The waterfall typically flows through stages: first, LPs get their capital back, next LPs receive a preferred return (hurdle rate), then any catch-up for the GP, and finally split the remaining profits (e.g. 80% LP, 20% GP carried interest). The waterfall ensures LPs are paid back (with a minimum return) before the GP earns carry. It’s essentially the formula for who gets what when a distribution happens.
Divestment Period: Also called the harvest period, this is the latter phase of a fund’s life when the focus is on exiting investments and returning capital to investors. After the investment (commitment) period, a PE fund typically has a divestment period of ~4–6 years to sell or otherwise liquidate its portfolio holdings. During this time, the GP seeks to maximize exit values through sales, IPOs, or other liquidity events.
Dividend Recapitalization (Dividend Recap): A transaction where a company owned by a PE firm takes on new debt specifically to pay a large special dividend to shareholders (often the PE fund). Essentially, the PE firm “recaps” the company’s balance sheet by levering it up and pulling out cash. This allows the PE fund to return money to investors (realize some gains) without selling the company. A dividend recap increases the company’s debt and risk, but can be an attractive way for PE sponsors to get liquidity if credit markets are friendly.
Due Diligence: The research and analysis conducted before finalizing an investment or acquisition. Due diligence in PE involves evaluating a target company’s business, finances, legal matters, and risks in detail. A PE firm will examine everything from financial statements and customer contracts to management background and market conditions. Proper due diligence helps investors confirm the company’s value and uncover any red flags or issues. In other words, it’s the “look before you leap” process to ensure the investment aligns with their strategy and return goals. (Investors raising money from PE funds also perform due diligence on the fund and GP.)
Dry Powder: Slang for capital that is committed to a fund but not yet invested (or generally, cash reserves set aside for future opportunities). In private equity, dry powder refers to the money a firm still has available to spend on new deals. For example, if a fund raised $500 million and has invested $300 million, it has $200 million of dry powder remaining. High levels of dry powder in the industry indicate that PE firms collectively have a lot of cash waiting to be put to work in new investments.
EBITDA: An acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA is a common measure of a company’s operating performance, roughly equivalent to cash flow from operations. PE professionals use EBITDA to assess a company’s profitability independent of its capital structure and non-cash expenses. It’s a handy metric for comparing companies and for valuation (many acquisition prices are quoted as a multiple of EBITDA). For example, a company with $10M EBITDA and a 6x EBITDA purchase price would be valued at $60M. (Caution: EBITDA is not actual free cash flow, but it’s a useful proxy.)
Enterprise Value (EV): A measure of a company’s total value, often used in valuation. Enterprise value is calculated as the company’s equity value (market capitalization for a public firm) plus debt, minus cash. It represents the theoretical takeover price of a company (what a buyer would pay for the equity and to assume or pay off debt, net of cash). In PE, EV is used in ratio analyses (EV/EBITDA multiples) to compare deal valuations. For instance, if a company has $50M equity value, $20M debt, and $5M cash, its EV = $65M.
Equalization Payment: In a fund context, these payments arise when new investors join a fund at a later closing after the first close. Equalization payments are made by later investors to “catch up” with earlier investors, compensating them so that all investors are treated as if they invested from the start. This often involves the new investors paying into the fund the amount of capital calls they missed, plus an interest factor, which is then distributed pro rata to the earlier investors. It equalizes the playing field among investors across multiple closings.
Escrow: An arrangement where funds or assets are held by a third party (escrow agent) pending the fulfillment of certain conditions. In PE/M&A deals, part of the sale proceeds might go into an escrow account for some period after closing to cover any potential indemnity claims (e.g., if post-closing issues or breaches of reps and warranties arise). If all is well after the agreed period, the escrow money is released to the seller.
Exit Strategy: The plan for how a PE firm will eventually exit (sell or monetize) its investment in a portfolio company. Common exit strategies include a trade sale (selling to another company), secondary buyout (selling to another PE firm), or IPO (taking the company public). Having a clear exit route is crucial when making the investment, as that’s how the fund realizes returns. For example, a growth equity investment exit might be selling the company to a larger strategic buyer in 5-7 years.
Feeder Fund: An investment vehicle that pools money from investors and then invests into a larger master fund. In private equity, feeder funds are often used to allow smaller investors or those in different jurisdictions to participate in a main fund. The feeder feeds into the master fund, which actually makes the investments. This master-feeder structure is common for big funds with global investors for regulatory or tax reasons.
Final Closing (Final Close): The last closing date of a fund’s fundraising period. At final closing, the fund stops accepting new investor commitments. After this, the total committed capital is fixed. For example, a PE fund may have an initial close after it raises 50% of its target and a final close a few months later when it hits 100% of the target. “Final close” essentially marks the end of fundraising and the start of fully focusing on investments.
First Closing (First Close): The point in fundraising when a fund has secured a minimum amount of commitments to begin operations. At first close, the fund holds an initial closing with early investors, allowing it to start investing even as it continues to raise the remaining target capital. Early investors may get incentives (like fee discounts) to commit by the first close. It indicates the fund is now active (making investments) even though fundraising isn’t yet completed.
Fund of Funds (FoF): A fund that invests in other investment funds rather than directly in companies. A private equity fund-of-funds might take LP stakes in many PE or VC funds, providing investors with a diversified portfolio of funds. Essentially, it’s a layer that allocates capital to multiple PE managers. The benefit is diversification and access to top funds; the drawback can be an extra layer of fees.
Fundraising: The process by which a PE firm solicits commitments from investors (LPs) for a new fund. Fundraisingstarts with a Private Placement Memorandum and meetings with prospective LPs, and ends when the fund has its final closing. This period is critical for a PE firm’s success – strong past performance and relationships help in raising a fund. For example, a venture capital firm might spend 6-12 months fundraising to raise a $200M fund from pension funds, endowments, and family offices. Once fundraising ends at final close, the focus shifts entirely to investing.
General Partner (GP): In the context of private equity funds, the GP is the fund manager – the entity (or team) that manages the fund’s investments and has unlimited liability for the partnership’s obligations. The GP sets the fund strategy, sources deals, makes investment decisions, and manages the portfolio. Typically, a GP is a firm (structured as an LLC/limited partnership itself) and the individuals are often called the sponsors or PE firm. Note: “General Partner” can also refer to the specific partner role in a limited partnership structure. In everyday use, LPs are the investors and the GP is the private equity firm.
GP Commitment: The money that the General Partner contributes to its own fund. Most PE fund agreements require that the GP invest a certain percentage (often 1–3% of the fund size) as a GP commitment to ensure “skin in the game”. This aligns interests by having the managers’ own capital at risk alongside LPs. For instance, if a fund is $500M, the GP might commit $10M of its own money into the fund.
Gross vs. Net IRR: Gross IRR refers to the Internal Rate of Return on the fund’s investments before deducting fees and carry, whereas Net IRR is what LPs receive after all fees and the GP’s carry. PE firms often report gross IRRs for portfolio company deals and a net IRR for the fund as experienced by LPs. LPs care most about the net IRR, as it reflects their actual return.
Hard Cap: The maximum amount of capital a fund will raise, as stated in the fund’s documents. The hard cap is a firm limit – the GP will not accept commitments beyond this amount. For example, a fund might target $500M with a hard cap of $600M (meaning even if there’s more investor demand, they stop at $600M). A hard cap is often used to create fundraising discipline or scarcity.
Hurdle Rate (Preferred Return): The minimum annual return that the fund must achieve for LPs before the GP can start collecting carried interest. Commonly around 8% for many PE funds, this preferred return means LPs get an 8% annual return (compounded) on their invested capital first; only after that does profit-sharing (carry) kick in. If a fund doesn’t clear the hurdle, the GP gets no carry. For instance, with an 8% hurdle, a successful fund must deliver above 8% IRR to its investors before the GP’s 20% profit share applies.
High Water Mark: Though more common in hedge funds, in PE a “high water mark” concept may apply to certain performance fee calculations. It ensures a GP only earns carry on new value created, not on recoveries of prior losses. In private equity, the clawback provision effectively serves a similar purpose at the fund’s end – making sure the GP only keeps carry if the fund as a whole beat the hurdle and returned capital.
Holding Period: The duration an investment is held by the PE fund. Typical holding periods for PE-backed companies range ~3 to 7 years. It’s essentially the time between a portfolio company’s acquisition (entry) and its exit. Longer holding periods can hurt IRR (since IRR is time-sensitive), but PE firms balance this against achieving a strong multiple on invested capital. Strategies like venture capital may have longer holding periods compared to buyouts due to the time needed for startups to mature.
Hockey Stick Growth: A colloquial term (especially in venture investing) describing a startup’s revenue or user growth that is flat for a while and then sharply rises, resembling a hockey stick’s shape. PE growth investors seek companies on the verge of hockey stick growth. While not formal PE jargon, you might hear it in discussions about a company’s projected trajectory.
Initial Public Offering (IPO): The process of offering a private company’s shares to the public stock market for the first time. For PE, an IPO is one form of exit – taking a portfolio company public so that shares can be sold on the open market. IPOs can provide a lucrative exit if the market values the company highly. However, post-IPO, the PE firm usually sells its shares gradually (due to lock-ups). Example: A PE-owned tech company might IPO on the NASDAQ, allowing the PE fund to distribute shares or cash to LPs over time.
Internal Rate of Return (IRR): The annualized rate of return earned on an investment or series of cash flows. In PE, IRR is the key metric that accounts for both the magnitude and timing of cash flows – contributions (negatives) and distributions (positives). A higher IRR means the fund returned investor money faster or in greater amounts. For example, a 25% IRR means if you invested $1 it effectively grew at 25% per year. Net IRR to LPs is after fees; Gross IRR is before fees. PE funds often target IRRs in the high teens or above.
J-Curve: A characteristic curve of private equity fund performance over time, shaped like a “J”. In the early years, the fund’s returns are negative (due to management fees and initial investment losses or unrealized gains), and later years show significant positive returns as investments mature and exit. The J-curve illustrates how PE funds typically lose money in the beginning (paper losses) then, as portfolio companies are sold at a profit, the returns turn positive and shoot up. For investors, it means they must be patient through the early dip before the fund’s value hopefully rises above the initial capital.
Joint Venture (JV): A business arrangement where two or more parties (often companies or investment groups) agree to combine resources for a specific project or company. In PE, JVs may occur when a PE firm partners with a strategic company or another PE firm to invest in a large deal. Each party owns a stake in the venture. Joint ventures can share risk and expertise – for example, two firms might form a JV to co-develop a new real estate project.
Leveraged Buyout (LBO): The acquisition of a company using a significant amount of borrowed money (leverage) to fund the purchase. In an LBO, the assets and cash flows of the target company are used as collateral for the debt, which the company will repay over time. PE firms conduct LBOs to acquire companies while putting in relatively little of their own equity. A classic LBO might use 60-70% debt and 30-40% equity. The goal is to boost equity returns via leverage – if the company’s value grows or debt is paid down, the equity (owned by the PE fund) gains magnified value. However, LBOs are risky if the company’s cash flows can’t support the debt.
Limited Partner (LP): The investors in a private equity fund, typically institutions or high-net-worth individuals who commit capital but do not take part in day-to-day management. Limited Partners have limited liability (they can’t lose more than they invested). Common LPs include pension funds, endowments, sovereign wealth funds, insurance companies, and family offices. LPs earn returns from the fund’s investments net of fees. They rely on the General Partner (GP) to manage the fund and generate returns. In summary, LP = money provider, GP = money manager.
Limited Partnership Agreement (LPA): The legal contract between the GP and LPs setting the fund’s terms and governance. The LPA covers things like the fund’s duration, fees, hurdle rate, distribution waterfall, GP commitment, key man clauses, and more. It’s the rulebook of the fund. While not jargon a newcomer needs to use daily, knowing that “according to the LPA” means according to the fund’s governing contract can be helpful. (Aspiring PE professionals eventually familiarize themselves with LPA terms.)
Liquidation (Stage): In a fund context, the liquidation stage refers to winding down the fund – selling off remaining assets and distributing the final proceeds to LPs. In a company context, liquidation means selling all assets (often in distress or bankruptcy). But in PE discussions, one might hear about a fund entering its liquidation period after the investment holding period, meaning it’s time to exit the deals and wrap up the fund.
Liquidity Event: An occurrence that allows investors to realize gains in cash or marketable stock. In private equity, typical liquidity events are trade sales (company is acquired), IPOs, or recapitalizations/dividends. It’s essentially an exit. LPs get distributions as a result of liquidity events at the portfolio company level.
Management Buy-In (MBI): An acquisition where an outside management team buys into the company, usually with the backing of a PE firm. In an MBI, new managers from outside replace or join the current management and take an ownership stake, often investing alongside the PE sponsor. It contrasts with an MBO (below). Example: A PE firm partners with an experienced CEO to acquire a division of a larger company – the CEO is the “buy-in” management.
Management Buyout (MBO): An acquisition of a company led by its existing management team, typically supported by a private equity fund. In an MBO, the managers of the company become significant owners (often rolling over equity or investing newly) alongside the PE firm. This can happen, for instance, when a founder wants to sell, and the management team teams up with a PE sponsor to purchase the company. MBOs align management and investor interests since managers become owners.
Management Fee: The annual fee paid by the fund to the GP for managing the investments. It’s usually a percentage of committed capital or net asset value – commonly around 2% of the fund size per year. For example, on a $500M fund, 2% management fee is $10M per year, which covers salaries and expenses of the PE firm. Management fees compensate the GP for their work (aside from performance-based carry). Note that as the fund ages, the fee may step down on invested capital or NAV.
Master-Feeder Structure: A fund structure involving a master fund and one or more feeder funds. Investors put money into regional or specific feeder funds, which in turn feed into a central master fund that makes the investments. This structure is often used to accommodate different types of investors (e.g., offshore vs onshore) or regulatory requirements, while managing one pool of assets at the master level.
Mezzanine Debt (Mezzanine Financing): A hybrid form of financing that is subordinate to senior bank debt but ranks above equity in the capital structure. Mezzanine debt often comes with equity-like features, such as warrants or conversion rights, to boost returns. It typically carries a high interest rate (to compensate for higher risk) and is used in LBOs to fill the financing gap between senior loans and equity. For instance, a PE firm might use $70M senior debt, $15M mezzanine, and $15M equity to fund a $100M buyout. The mezzanine lender may get interest plus a small equity stake. This financing is called “mezzanine” because it sits in the middle of debt and equity.
Multiple on Invested Capital (MOIC): Also known simply as “multiple” or equity multiple, it is the ratio of total value to invested capital. MOIC = (cash returned + current value of holdings) ÷ cash invested. It measures how many times the initial investment has been returned, ignoring time value. For example, if a fund invested $100 and ultimately returns $300, that’s a 3.0x MOIC. Unlike IRR, MOIC doesn’t consider when returns occur. It’s useful for understanding absolute gain. Fund performance reports often show MOIC alongside IRR (e.g., “Fund II is a 1.5x MOIC, 12% IRR”).
Net Asset Value (NAV): In private equity, NAV is the estimated fair value of the fund’s remaining investments plus any other assets, minus liabilities. It’s essentially the current value of what the LPs’ stake in the fund is worth at a point in time (before final liquidation). PE funds report NAV quarterly. For example, if a fund has invested $80M (paid-in) and its holdings are estimated to be worth $100M now, the fund’s NAV might be $100M (assuming no debt at fund level). NAV is used in calculating interim metrics like RVPI.
No-Fault Termination/Dissolution: Clauses in a fund’s LPA that allow investors to end the fund or remove the GP without cause if a supermajority of LPs agree. A no-fault termination (or dissolution) might let LPs stop the investment period or wind down the fund if, say, they lose confidence in the team or strategy, even absent misconduct. These rights are seldom used (due to high voting thresholds like 75% in interest), but they give LPs an emergency exit option in governance.
Non-Disclosure Agreement (NDA): A legal contract ensuring confidentiality of information shared. In PE deal processes, interested buyers sign an NDA to get access to the confidential information memorandum (CIM) and data room of a target company. Breaking an NDA can lead to legal repercussions. Virtually every deal starts with an NDA between the parties.
Non-Recourse Debt: Debt where the lender’s claims are limited to the collateral (often the acquired company’s assets) and cannot pursue the borrower’s or sponsor’s other assets. In LBOs, the buyout debt is typically non-recourse to the PE fund; the lenders can only seize the portfolio company’s assets if the debt defaults, not the fund’s other assets. This feature is why PE firms can use leverage without risking the entire partnership.
Operating Partner: An individual at a PE firm (often an experienced industry executive) who focuses on working with portfolio companies to improve operations and strategy, rather than sourcing deals or managing the fund. Operating partners are part of the PE firm’s team and play hands-on roles such as interim management, cost-cutting initiatives, or growth projects at companies the fund owns. They help drive value creation beyond financial engineering.
Option Pool: (Venture Capital term) A portion of a startup’s equity reserved for future employee stock options. In crossover context, when PE or VC invests in a high-growth company, they often make sure an adequate option pool is set aside to incentivize management. This pool dilutes all shareholders, including new investors, so negotiations often revolve around its size pre- or post-investment.
Origination (Deal Sourcing): The process by which PE firms find and initiate new investment opportunities. Origination can involve networking with industry executives, contacting business owners, using investment bankers, or cold-calling companies. Strong deal origination capabilities are a competitive advantage – the more proprietary or early looks a firm gets, the better the chance to invest in attractive deals before they become auctions.
Paid-In Capital (PIC): The actual amount of capital that LPs have contributed (paid in) to the fund so far. PIC multiple(or ratio) is sometimes referenced, which is paid-in capital ÷ committed capital – showing what percentage of the pledged money has been called. For example, a PIC multiple of 0.6x means 60% of the commitments have been drawn down. Paid-in capital is the denominator for performance ratios like DPI, RVPI, and TVPI.
Portfolio Company (PortCo): A company that a private equity or venture capital fund has invested in and holds in its portfolio. For instance, if PE Fund III buys 10 companies, those 10 are its portfolio companies. The term is used to discuss operational matters: e.g., “Our portfolio companies collectively grew revenue by 15% last year” or “We placed a new CFO at one of our portcos.”
Preferred Return: See Hurdle Rate – Preferred return is another name for the hurdle rate that limited partners are promised (usually ~8% annually) before the GP can receive carry.
Private Equity (PE): In broad terms, private equity refers to investing in or buying equity ownership in companies that are not publicly traded on stock exchanges. It encompasses a range of strategies like buyouts, growth equity, venture capital, and others – basically any private market investing in equity (ownership stakes). A private equity firm raises capital from investors (LPs) and uses that pool to acquire businesses, improve them, and eventually sell at a profit. Private equity as an asset class is known for its potential high returns, hands-on ownership approach, illiquidity (capital locked up for years), and fee structure (management fees and performance fees).
Private Equity Fund: An investment vehicle organized usually as a limited partnership that pools money from LPs to execute a private equity strategy (buyouts, etc.). For example, “Fund IV” could be a $1 billion PE fund that will invest in 8–12 companies over a decade. The fund has a predetermined life (often 10 years plus extensions) and is managed by the GP (the PE firm). Each fund is separate – hence firms having Fund I, II, III, etc. sequentially.
Private Placement Memorandum (PPM): A detailed document provided to prospective investors during fundraising, outlining the fund’s strategy, terms, track record, team, and risks. A PPM (or offering memorandum) is essentially the pitch book and disclosure document for a private fund. It’s like a business plan for the fund plus all the fine print. LPs review the PPM to decide if they will commit capital. In deal-making, the term PPM can also refer to the document used to sell a company (also called CIM – Confidential Information Memorandum), but in a PE fund context, PPM refers to the fundraise document.
Public Market Equivalent (PME): A method to compare private equity fund performance to public markets. PME involves hypothetically “investing” the fund’s cash flows into a public index (like the S&P 500) to see what return that would generate, and then comparing that to the fund’s actual return. It answers: “If we put the money in public markets instead, what would we have gotten?” For example, a PME > 1.0x indicates the PE fund outperformed the public benchmark. Various PME calculation methods exist (Long-Nickels, Kaplan-Schoar, etc.), but the general idea is benchmarking PE against liquid market returns.
Quality of Earnings (QoE): An analysis conducted (often by accounting firms) during due diligence to assess how “real” and sustainable a company’s earnings are. A Quality of Earnings report digs into a company’s revenue recognition, expense accounting, non-recurring items, and accounting policies to adjust EBITDA or net income to a true, normalized level. PE firms rely on QoE to validate that the EBITDA they’re paying a multiple on is solid – e.g., excluding one-time gains, overly aggressive revenue recognition, or unmanaged expenses. In short, QoE separates recurring, core earnings from noise, ensuring the company’s financials reflect economic reality.
Quick Ratio (Acid-Test): A liquidity metric (current assets minus inventory, divided by current liabilities) indicating a company’s ability to meet short-term obligations. It’s more of a general finance term, but a PE investor might glance at a target’s quick ratio to gauge short-term financial health. Not a PE-specific jargon, so it’s good to know but not unique to private equity.
Realization Multiple: See DPI – The realization multiple is another term for DPI (Distributed to Paid-In). It measures the realized returns (cash out versus cash in) and excludes unrealized value.
Recapitalization (Recap): Broadly, changing a company’s capital structure by altering the mix of equity and debt. In PE, recap often refers to a dividend recapitalization (discussed above) or any refinancing event. A “recap” can also mean when a PE firm buys out other shareholders of a company (a form of secondary purchase) or when new investors come in and existing investors sell (recapitalizing the ownership). Essentially, think of recap as restructuring who owns what and how a company is financed, without necessarily changing the underlying business.
Residual Value to Paid-In (RVPI): A fund performance metric that measures the unrealized value remaining in the fund as a multiple of capital paid in. RVPI = (Net Asset Value) ÷ (Paid-In Capital). It shows how much value is left on paper for investors’ original money. For example, an RVPI of 0.8x means that, based on current valuations, the remaining holdings are worth 0.8 times the capital that was invested. RVPI combined with DPI gives TVPI (Total Value to Paid-In). If DPI is 1.2x and RVPI is 0.3x, then TVPI is 1.5x, indicating total performance including unrealized positions.
Rights Issue: A form of equity raise where a company offers additional shares to existing shareholders, usually at a discount, to raise capital. In a PE context, if a portfolio company needs more equity (perhaps to reduce debt or fund an add-on acquisition), the PE owner might do a rights issue – essentially investing more money (and inviting other shareholders to do the same) in return for more shares. It’s more common in public companies, but the concept can apply in private ones too when multiple shareholders participate in a capital increase.
Roll-Up: A strategy of acquiring multiple smaller companies in the same industry and merging them together to create a larger player. Private equity firms execute roll-ups to achieve economies of scale and increased market power (this is closely related to buy-and-build). For example, a PE firm might roll up dozens of local dental practices into a large national dental clinic chain. The platform company “rolls up” the industry by repeated add-on acquisitions.
Return on Investment (ROI): A generic metric for the percentage gain or loss on an investment. In PE, ROI might be used informally to describe the total return (e.g., “we made 3x, that’s a 200% ROI”). However, more precise terms like IRR and MOIC are preferred in the industry. Still, understanding ROI in plain terms – (amount gained – amount invested) ÷ amount invested – is fundamental.
Secondaries (Secondary Market): In PE, “secondaries” can refer to two things: (1) the secondary market for limited partner interests, where an LP sells its fund stake to another investor; and (2) secondary buyouts, where one PE firm sells a portfolio company to another PE firm. The secondary market for LP interests allows investors to obtain liquidity before a fund ends – an LP can sell their remaining stake to a secondary buyer, often at a negotiated price (maybe at a discount to NAV). A secondary purchase in this context is the act of buying an existing LP’s interest. Secondary buyouts (one PE-to-PE sale of a company) have become common, essentially giving one fund an exit and another fund a new investment. The secondary market provides flexibility and liquidity in the otherwise long-term, illiquid PE asset class.
Senior Debt: The loans or debt that have the highest priority claim on a company’s assets and cash flows. In an LBO, senior debt (like bank loans) gets paid first in a recovery and typically has the lowest risk and interest rate. Senior lenders often secure their loans with collateral. For example, a revolving credit facility and first-lien term loan in a buyout are senior debt. They must be paid in full before any subordinated/junior debt in case of default.
Skin in the Game: A phrase indicating that the stakeholders (often the management team or the GP) have a meaningful personal investment at risk, aligning interests with the other investors. In PE funds, the GP commitment (mentioned earlier) is the GP’s skin in the game. At the portfolio company level, when a PE firm requires management to roll equity or invest their own money in the deal, it’s to ensure management has skin in the game (they stand to gain or lose alongside the PE firm).
Special Purpose Vehicle (SPV): A legal entity created for a specific transaction or purpose, often to isolate financial risk. In PE, an SPV might be formed to make a single investment outside of the main fund (e.g., a co-investment SPV for a particular deal). SPVs are also used in fund structures for tax or regulatory reasons – for example, an SPV could hold a certain asset or be used to pool a subset of co-investors. Essentially, it’s a standalone company set up to facilitate a deal (often to hold assets and debt for that deal).
Subordinated Debt (Junior Debt): Debt that ranks below senior debt in claim priority. Subordinated debt will only be repaid after senior lenders are paid in full. In an LBO capital stack, subordinated debt could be second-lien loans, mezzanine notes, or vendor notes – these carry higher interest to compensate for higher risk. If the company is liquidated, subordinated lenders recover value only after senior creditors have been satisfied. (Equity is below subordinated debt, which is why sub debt is still considered part of the debt for leverage purposes.)
Sweat Equity: An informal term for equity earned by contributing effort and work rather than cash. In a management buyout or startup scenario, founders and key managers often get sweat equity – ownership shares in return for building the company, “sweat,” as opposed to investing money. PE firms may use the term when structuring management incentive equity, effectively giving management a stake (sweat equity) to motivate them, which can become very valuable if the company performs.
Syndication: The process of spreading a large loan or investment across multiple financial institutions or investors. In the context of a leveraged buyout, the lead bank will syndicate pieces of the large debt package to other banks or institutional lenders so that no single lender has to take the full amount. In equity, sometimes PE firms syndicate deals by inviting co-investors or other funds to take part in a big investment they cannot or prefer not to do alone. Club deals (multiple PE funds teaming up for one buyout) are a form of equity syndication.
Tag-Along Rights: Contractual rights that allow minority shareholders to tag along in a sale if the majority shareholder sells their stake. In PE-backed companies, management or minority co-investors often negotiate tag-along clauses so that if the PE fund decides to sell its controlling stake, the minority holders can sell their proportional shares on the same terms to the buyer. This protects minor investors from being left behind with new, perhaps less desirable owners.
Take-Private: A transaction where a public company is acquired and taken private, meaning its shares are delisted from the stock exchange. PE firms often do take-private deals (public-to-private, or P2P) for attractive public companies, especially if they see value that can be unlocked away from the public eye. Example: a PE consortium takes a struggling public retailer private in a leveraged buyout, with plans to restructure it outside of quarterly earnings pressure. Going private removes public reporting requirements and allows concentrated ownership.
Target Company / Target Fund: The company that is being pursued for acquisition is the target. In fund-of-funds context, a target fund is a fund that a FoF invests into. For example, a FoF might list several target PE funds it plans to commit to. In everyday use, when someone says “the target,” they mean the company that is the object of the investment or M&A deal.
Term Sheet: A non-binding agreement outlining the key terms and conditions of a proposed investment or transaction. In venture capital and growth equity, a term sheet is often the first formal document that lists valuation, amount to be invested, ownership structure, investor rights (like liquidation preference, board seats), etc. It’s like a blueprint for the final deal documents. In PE buyouts, term sheets (or Letters of Intent) outline purchase price, financing, and exclusivity period. While not legally binding (except certain provisions like confidentiality or exclusivity), term sheets are “reputationally” important and guide lawyers in drafting definitive agreements.
Time Horizon: The expected duration of an investment. Private equity has a long time horizon – typically a fund life of 10 years with possible extensions, and each portfolio company investment might be held 4-7 years on average. Investors in PE need a long-term horizon, as their capital is locked in. When evaluating opportunities, PE firms also consider the company’s time horizon for growth or turnaround – e.g., a firm might say “our time horizon for this investment is 5 years to execute the value creation plan.”
Total Value to Paid-In (TVPI) Multiple: A fund’s total value (distributed plus remaining value) divided by the capital paid in by investors. TVPI is also known simply as the investment multiple. It combines DPI and RVPI: TVPI = DPI + RVPI. For example, if a fund has returned $80M (DPI) and still has $20M worth in portfolio (RVPI) on $100M paid in, the TVPI = 1.0x + 0.2x = 1.2x. A TVPI above 1.0x means value has been created (on paper or realized). LPs watch TVPI throughout the fund’s life, but ultimately, DPI (cash) is king – however, TVPI gives the full picture of potential final performance.
Turnaround: An investment strategy or situation where the company is in distress or underperforming, and the new owners (often PE or special situation investors) aim to turn it around – i.e., make operational improvements, restructure finances, and restore it to profitability. Turnaround specialists might step in as interim management. Many distressed PE funds focus on turnarounds, buying struggling companies cheaply and trying to fix them.
Venture Capital (VC): A form of private equity focused on investing in early-stage or growth companies with high growth potential (often startups in technology or life sciences). Venture capital firms take minority stakes in young companies (seed, Series A/B rounds, etc.) in exchange for capital to grow the business. While venture is technically under the PE umbrella (since it’s private investing in equity), in practice “PE” usually refers to later-stage buyouts and growth equity, whereas “VC” refers to early-stage investing. VC funds expect most investments to fail or break even, but a few big successes (the next unicorns) drive their returns.
Vintage Year: The year in which a private equity fund makes its first investment (or officially starts investing) – effectively the fund’s birth year. Vintage year is used to categorize and compare funds, since economic and market conditions vary by vintage. For example, one might compare “2008 vintage” buyout funds as a peer group. It’s important in benchmarking; a 2015 vintage fund is compared against other 2015 funds, since they operated under similar macro conditions. It also marks the beginning of the fund’s investment period clock.
Volatility: A general finance term referring to the variability of returns. Private equity investments aren’t marked to market daily, so reported volatility of PE returns is lower than public stocks – but that’s partly an illusion of infrequent valuation. When considering risk, PE investors acknowledge that individual deals can be very volatile (high risk of loss), but a diversified PE fund may show smoother performance volatility due to valuation practices. Nonetheless, PE is considered high-risk/high-return, with “volatility” hidden in illiquidity and uncertainty of outcomes.
Waterfall: See Distribution Waterfall – the mechanism of allocating distributions in a private equity fund. Also in an LBO modeling context, a waterfall can refer to the payout order of different equity classes or debt tranches in a sale (who gets paid first, etc.). But generally, in PE lingo, “waterfall” means the fund profit distribution scheme.
Warrant: A security that gives the holder the right to purchase shares at a specific price before expiration. In PE deals, warrants often come attached to mezzanine debt or as part of structured equity deals, providing upside if the company’s value increases. For example, a mezzanine lender might get warrants equal to 2% of equity, allowing them to share in the upside if the company is later sold for a high price. Warrants are like long-term options and are a sweetener to debt financing.
Write-Off: When an investment is realized as a loss (essentially marked down to zero value). If a portfolio company fails or goes bankrupt, the PE firm writes off that investment. It’s the unpleasant side of the high-risk game – not every deal is a winner, and some go to zero. Write-offs hurt the fund’s returns but are part of venture especially (many startups result in write-offs).
Write-Up / Write-Down: Adjusting the valuation of a portfolio company upward (write-up) or downward (write-down) on the fund’s books. Since PE investments are illiquid, GPs periodically value them. A strong quarter or favorable comparable company performance might justify a write-up of a portfolio company’s carrying value. Conversely, if a company underperforms, the GP might write down its value. These are unrealized gains or losses. Too aggressive write-ups can be misleading, so industry guidelines (like ILPA guidelines or accounting standards) govern valuation practices.
Zombie Fund: A private equity or venture fund that has stopped making new investments and struggles to exit its remaining holdings, yet continues to operate (often beyond its intended life), collecting management fees but returning little to investors. In other words, a fund that “won’t die” even though its performance is weak. A zombie fund still holds some or all of its portfolio companies past the expected holding period, usually because it’s struggling to sell those investments at a profit. This situation can lead to misalignment of interest: the GP keeps drawing fees while LPs are stuck with illiquid, stagnating investments. The rise of secondary markets and continuation funds in recent years partly aims to address the issue of zombie funds by giving LPs an exit option.
For those looking to deepen their understanding of private equity and related finance topics, here are some credible sources and textbooks:
By exploring these resources, readers can build a stronger grasp of private equity concepts, from the high-level strategy down to the nitty-gritty of deal terms and financial modeling. Each source above will help reinforce the glossary definitions with broader context, examples, and the latest industry practices. Good luck on your private equity learning journey!