Business Development Company (BDC)

An investment structure, a closed-end investment company, that invests in in equity and/or debt of a company and must invest at least 70% of its assets in eligible companies. These include private companies as well as public companies with market values of less than $250 million. There are traded, private and non-traded BDCs.

Buyouts

An investment which typically involves taking co- or majority control of a mature company (either listed or non-listed), with a proven, often profitable business model. Typically, the transactions are financed with a combination of debt and equity financing. Typical targets have predictable cash flows to repay debt used in acquisition, and the private equity manager will seek strategy and operation improvements to boost growth and profits. These investments can be across broad categories and historically have spanned all industries and most geographies.

Capital Call

The act of requesting the investor to transfer a portion of their capital commitment to the General Partner.

Capital Commitment

The amount of money the investor seeks to invest in the fund, and the amount they should expect to transfer to the General Partner during the fund’s investment period.

Capitalization Rate

A calculation used to measure the potential performance on a real estate investment. The equation is net operating income over the current market value or price of a real estate asset.

Carried Interest (Carry)

Performance fees, paid on the realized (distributed) value appreciation of assets in the fund. Typically, these are charged only after a preferred return threshold has been met. Carry may be charged either on a deal-by-deal basis or for the overall fund’s performance.

Direct Alpha

A metric used to compare the performance of a private investment to a public benchmark, taking into account the private fund’s cash flows. A positive direct alpha figure means the private investment outperformed the public benchmark; a negative figure means the private investment underperformed.

Direct Lending

The practice of non-bank lenders extending loans to businesses in privately negotiated transactions.

Distressed

Investments in firms or assets needing drastic change and often guidance through a restructuring process. Equity is often established via debt conversion. Distressed private equity has countercyclical performance features.

Distribution

The act of returning capital from the fund back to investors. Distributions often occur in conjunction with a realization (e.g., sale) of an investment in the fund. Strategies with a yield component feature yield distributions in addition to realizations-related distributions.

Distributions to Paid-In Capital (DPI)

A fund performance metric expressed as the ratio of distributions since fund inception to the overall capital called since inception.

Dry Powder

The amount of capital a fund has left to deploy, equal to the total amount raised by the fund less capital already deployed into investments.

Equity Long/Short

A hedge fund investment strategy that selects stocks to potentially profit from both rising and falling stock prices (please see: Shorting)

Event Driven

A hedge fund investment strategy that seeks profit from company events, such as mergers or bankruptcies.

Exchange Funds

Private vehicles which enable holders of concentrated stock positions to exchange those stocks for a diversified portfolio.

General Partner (GP)

The fund manager. The GP identifies, evaluates, acquires, and manages investments on behalf of the fund’s investors.

Global Macro

A hedge fund strategy that focuses its holdings on macro-economic or political views leveraging a range of positions such as long and short investments across fixed income, equity and commodity markets.

Growth Equity

An investment in maturing, rapidly growing companies at an inflection point. They may be profitable, or have a clear path to profitability, with solid unit economics and a large addressable market. They need strategic capital to accelerate their trajectories, but may not yet be ready for, or interested in, becoming public. These investments help facilitate growth and the expansion of operations, can assist teams in transition, or finance a transforming event. There is typically no change in control of the business.

Harvest Period

The period during which the fund manager realizes its investments and distributes proceeds to investors. Harvesting usually begins 4-6 years into the fund’s life (although timing will vary by strategy and by fund). Most capital is returned within the first 8-12 years; subsequent distributions are typically smaller.

Hedge Fund

Private, pooled investment vehicle offered via private placement to qualified investors, including certain high net worth individuals and institutional investors.

Hedge Fund Replication

A quantitative strategy that seeks to mimic the returns of a hedge fund index.

Infrastructure

Assets and operations involved in the production of critical resources or transportation of goods, services, and people, typically with the following characteristics: defensive, contractual cash flows; limited competition; inelastic demand to economic cycles; and providing critical functions and services.

Investment Period

The contractual period during which the fund manager makes new investments and LPs contribute the capital they committed to the fund. The investment period typically lasts for 3-5 years, and each year may feature one or several capital calls. Capital may be reserved for follow-on contributions to existing investments after the end of the investment period.

Internal Rate of Return (IRR)

A performance metric that represents the annualized return generated over the life of an investment while capital is invested, accounting for contributions and distributions over time. It describes both how quickly the investor receives cash back from the fund and how much a fund manager has increased the portfolio’s value. If two funds have the same MOIC, the fund with the higher IRR returned the cash to investors faster.

J-Curve

A term that derives from the graphical pattern of cash flows of private market funds, wherein the initial years of a private markets investment feature net cash outflows from the investor, followed by inflows in subsequent years. J -curve can also refer to the pattern of returns exhibited by private market investments. A fund’s return may be low or negative during the early portion of its lifecycle, as investment-related fees and expenses accrue prior to the realization of investment gains. As the fund matures and as portfolio assets are sold, the return typically increases and approaches its final value. There can be no assurance, however, that private equity funds will exhibit this pattern of investment returns. 

K-1

A tax form for limited partnerships that reports profits and losses. 

Limited Partner (LP)

Investor in the fund. LPs contribute capital but do not take an active approach to the selection of portfolio assets nor participate in the day-to-day management of the fund.

Management Fee

Fees charged on the assets managed. A common fee structure is to charge fees on the committed amount during the course of the investment period, then switch to fees on the amount invested (cost basis of assets remaining in the portfolio). Some strategies charge on the amount invested from the outset. Funds may also decrease the fee rate (step-down) after the investment period.

Mezzanine

Investments in debt subordinate to the primary debt issuance and senior to equity positions. This means that in the event of default or bankruptcy, these creditors are in line behind senior debt but ahead of equity holders.

Multiple on Invested Capital (MOIC)

A fund performance metric expressed as the ratio of the current value of the fund’s investments plus distributions since inception to the overall capital called since inception. Another term for TVPI.

Net Asset Value

The value of the fund at any particular time. Includes investments in the fund at the time, excludes assets that were sold whose proceeds were already distributed to the investor. Also excludes uncalled capital.

Paid-In Capital

The amount of committed capital that has been called (transferred to the GP by the investor) to date.

Preferred Return (Hurdle Rate)

The minimum return that the fund must achieve for investors before it can start collecting carry. Many fee structures include a General Partner’s (GP) catch-up provision, wherein once the preferred return is reached, distributions are allocated to the GP until they equal the carry rate on all distributions to-date. Thereafter, distributions are allocated to GPs and limited partners (LPs) proportionately, based on carry levels (e.g., 20% to the GP and 80% to the LP in case of 20% carry).

Private Credit

Provides debt financing to a variety of borrowers – companies; real estate and infrastructure owners, developers and operators; consumers; intellectual property creators and owners; and others. Private credit strategies span the capital spectrum, from senior credit to hybrid equity/credit solutions.

Private Equity

Makes investments in the equity of companies not listed on a public stock exchange. These investments can take either full or minority ownership of the underlying companies. Private equity strategies span the company lifecycle, from startups with innovative ideas to mature businesses. Private equity portfolio managers can leverage different tools to drive value, depending on a company’s stage or the fund’s investment mandate.

Public Market Equivalent (PME)

A metric used to compare the performance of a private investment with a public benchmark. Calculated by hypothetically investing the cash flows of the private investment in the benchmark, then calculating a return using the cash flows of the private investment and the remaining value of this hypothetical investment.

Public REIT

A Real Estate Investment Trust that files with the Securities and Exchange Commission (SEC) and whose shares trade on national stock exchanges.

Real Estate Investing

Directly financing, developing, and operating properties or lending debt to finance real estate projects and development. These investments can be potentially income and capital appreciation-oriented, have inflation hedging features and potentially serve as a portfolio diversifier.

Real Estate Investing

Directly [or indirectly] acquiring, financing, and developing. These investments can be potentially income and appreciation-oriented, have inflation hedging features and serve as a portfolio diversifier.  

Real Estate Core

Investments in lower risk real estate that provides the majority of returns through income. Properties are typically stable, with little improvement required, and offer a consistent yield with low leverage.

Real Estate Core Plus

Investments in moderate-risk real estate that provides income with the potential for appreciation. Investments are predominantly core but with an emphasis on growth and with moderate leverage.

Real Estate Value-Add/Opportunistic

Investments in higher-risk real estate that provides and the majority of return through appreciation. Investments are typically on assets in transition and more speculative in nature with higher leverage.

Remaining Value to Paid-In Capital (RVPI)

The ratio of current fund NAV to the overall capital called since inception.

Secondaries

Exposure to partially or fully-funded portfolios of private companies, acquired from primary investors or General Partners seeking liquidity solutions.

Senior Debt

Loans that are typically first-lien and highest in the capital structure – first in line to get repaid if a borrower is unable to meet all its debt obligations. These loans are therefore the most likely to recover debt owed.

Structured Solutions

Bespokesolutions involving both debt and equity investments in firms needing meaningful change. These investments can include all-weather hybrid equity/credit capital solutions and distressed/special situation investments. These are generally control investments to help guide firm firms through the change/restructure. Also called hybrid capital.

Subscription Period

The period during which LPs subscribe to the fund. Subscriptions entail investors signing a Limited Partnership agreement and legally committing to the fund. The process of bringing investors into a fund is called a “fund close”. A fund may have one or several closes in the subscription period. Capital may not be immediately drawn from the LPs upon subscription (sometimes called a “dry close”).

Total Value to Paid-In Capital (TVPI)

A fund performance metric expressed as the ratio of the current value of the fund’s investments plus distributions since inception to the overall capital called since inception.

Vintage Year

The year in which the fund was formed or started calling capital. Vintage year diversification is a proxy for diversification of investments across the economic cycle. Because the since-inception return evolves as the fund matures, evaluating a fund’s performance is most indicative by comparing its performance to those of similar funds from the same vintage year.

Venture Capital

Non-control investments in early-stage companies. These companies are typically young, with limited financial history, unproven products or concepts that have the potential to be transformative. Investor capital is used for research and development, product and business plan development, and expansion of operations. In many cases, entrepreneurs value their investors’ knowledge, operating expertise, and networks as much as, or more than, their financial capital.