Alternative Assets

Non-traditional investment assets - i.e. anything other than publicly traded equities, bonds or money market investments. Alternative assets include hedge funds, real estate, commodities and private equity, although the latter is increasingly coming to be viewed as a subset of the equity asset class.

Asset Allocation

The process by which an Institutional Investor builds a Balanced Portfolio, blending different types of investments in order to maximise Risk Weighted Return while developing a Liquidity Profile which meets the needs of the fund's beneficiaries.

Buyback

The acquisition by a company of its own shares. Often seen in quoted markets, where public companies buy their own shares in order to reduce supply and hence enhance the share price. In certain situations a private equity backed companies may propose to buyback its investors' shares, thus delivering them an Exit.

Buyout

Generic term for the acquisition of a company, usually led by or with the involvement of Financial Buyers. See Management Buyout, Buy and Build, BIMBO, Leveraged Buyout, Institutional Buyout, Secondary Buyout, Venture Buyout and Vendor Initiated Management Buyout.

Capital Gain

The difference between the cost of an asset - i.e. an investment in a fund or a company - and the proceeds realised on its sale. Because capital gains receive different - usually more favourable - taxation treatment than income, great efforts are expended in ensuring that as far as possible value creation is ascribed to the former rather than the latter.

Distressed Debt Investor

A class of investor who specialises in acquiring debt in underperforming companies, often using this as a means to gain control of the company.

Dividend

A payment, authorised by a company's board of directors, to its shareholders. Dividends can only be paid out of net after tax profits and must be covered by retained profit reserves in the balance sheet.

Due Diligence

The process of verifying that the facts and assumptions on which an investment or acquisition decision has been made are accurate and sound. A range of different aspects will be covered by different advisers, including Market, or Commercial Due Diligence, Financial, Management, Legal, Technical and Environmental.

Equity

Ownership of a company, divided into Ordinary Shares or Common Stock. Equity investment implies taking the highest level of risk in providing business finance in exchange for an agreed proportion of its future value.

Equity Risk

The level of risk associated with an investment or loan when, should the company fail, there is no recourse to any other means of recovering the investment. Many types of security provided by private equity investors may carry contractual rights to repayment (e.g. Preference Shares, Shareholder Loans) but nevertheless represent an Equity Risk as, in reality, an underperforming company would not be able to meet those contractual commitments.

Equity Value

The value of a company after making allowance for repayment of all outstanding debt; i.e. the value which is attributed to its equity holders.

Financial Buyer

A private equity or buyout fund, which will buy a company with a view to selling it, as opposed to a Trade or Strategic Buyer, which will usually seek to acquire a company for longer term strategic advantage.

Fund of Funds

A private equity fund that invests not in individual companies but in other private equity funds. Used by Institutional Investors as a means of Diversification and of gaining excess to the fund selection expertise of the fund of fund's manager.

Fund Manager

Will invest assets and implement investment strategy.

General Partner

The manager of a Limited Partnership, which is the structure adopted by most private equity funds. In general usage, the term General Partner, or GP, refers to a private equity firm.

Institutional Buyout ("IBO")

The acquisition of a company - invariably a large one - by private equity investors without the detailed involvement of its management. After completing the transaction, the investors will decide on the composition of the management team, either asking the incumbents to remain or replacing them, and incentivise the team with a share of the ownership.

Institutional Investors

Pension and endowment funds, insurance companies and other major financial institutions who invest capital in private equity funds.

Investor Director

A director appointed to the board of an Investee Company by its private equity investor.

Lead Investor

The dominant member of a Syndicate; usually the largest investor who takes the lead role in appraising, negotiating and managing the investment.

Leveraged Buyout/ LBO

A buyout which is predominantly financed by debt. Usually characterised by stable, low growth companies with strong and predictable cash flows

Limited Partners

Generic term for Institutional Investors in a private equity fund.

Limited Partnership

The most commonly used structure for a private equity fund. As a partnership, it is tax transparent - that is, each partner (i.e. investor) accounts directly for their own tax on income and Capital Gains arising from their share of the fund. The fund is managed by a General Partner - i.e. a private equity firm.

Management Buy-In

Where an outside manager or team purchases an ownership stake in a company and replaces the existing management team.

Management Buyout

The acquisition of a company by its management team, usually in partnership with external lenders and/or private equity investors.

Mezzanine Financing (or Loan)

A Junior Loan which carries the right to participate in the Equity of the borrower, usually by carrying Options to purchase shares at a nominal value. Hence mezzanine lies somewhere between pure equity and pure debt finance. Mezzanine loans will usually carry a significantly higher interest rate than that which applies to Senior Debt, and will carry a long term (8 or more years) Bullet repayment.

Middle Market

Medium sized companies; definitions vary according to region, but in Europe companies valued in the €100 million to €500 million range would be regarded as mid-market.

Placement Agent

An advisory firm that helps private equity firms to raise funds, by virtue of its extensive knowledge of, and contacts and credibility with, the Institutional Investor community.

Portfolio Company

A company which has received funding from a private equity fund and therefore constitutes part of its Portfolio. Also known as an Investee Company.

Private Investment in Public Equity ("PIPE")

Investment by a private equity fund in a publicly quoted company. This will normally be undertaken by using Preference Shares or similar, which are not made available for purchase by other investors, and which are Convertible into Ordinary Shares (or Common Shares) at a pre agreed price; the investor will then achieve an exit by selling these in the stock market.

Secondary

Generically, the sale of securities by their owners, rather than the initial ("Primary") sale by the company issuing them. In private equity, the term generally refers to Limited Partners who sell their investments in private equity funds to other investors, rather than waiting for the funds to produce Distributions in the normal way.

Secondary Buyout

A private equity backed buyout of a company which already has private equity investors following a previous (or "Primary") buyout.

Secondary Funds

Funds which specialise in buying Secondary investments in other private equity funds.

Venture Buyout

The buyout of a company which has not reached stable, profitable trading and therefore carries a higher degree of risk.

Venture/ Venture Capital

Capital which is subject to more than a normal degree of risk and is usually associated with a new business.