alternative investing
Private equity falls under the category of alternative investments and may be referred to as such. The “alternative investing” category encompasses other private investments such as hedge funds and real estate. Mainstream investing refers mainly to mutual funds or other investments that everyone can invest in (without needing a certain net worth to do so).
artificial Intelligence
The concept of programming computers and other technology to perform functions and tasks in a “smart” manner that mimics human decision-making processes.
asset classes
Asset class means a type of investment, such as stocks, bonds, real estate, or cash.
assets under management (AUM)
The net asset value of private equity investments or of other investment firms.
bear market
A time in which the prices of stock in the market are falling or are expected to fall.
blockchain technology
A distributed ledger database that maintains a continuously-growing list of financial records that cannot be altered.
bull market
A time in which the prices of stock in the market are rising or are expected to rise.
buy, strip, and flip
A situation in which a private equity firm buys out a target firm (usually with a leveraged buyout) and then sells the target firm in an IPO within a short period of time.
buyout
A transaction in which a private equity firm acquires a significant amount of equity in a business.
capital
Money or assets owned by a private equity firm that can be used in its investment activities.
capital overhang
The current amount of capital that is available to private equity investors.
Chapter 7
The section of the U.S. Bankruptcy Code that details the process for asset liquidation.
Chapter 11
The section of the U.S. Bankruptcy Code that details the process for asset reorganization.
chartered financial analyst
An individual who has passed tests in economics, accounting, security analysis, and money management, administered by the CFA Institute. Such an individual is also expected to have at least four years of investment-related experience, and meet certain standards of professional conduct. These individuals have an extensive economic and investing background and are competent at a high level of analysis. Individuals or corporations utilize their services as security analysts, portfolio managers, or investment advisors.
closed fund
A private equity fund that has concluded accepting financial commitments from limited partners.
contrarian investor
A type of investor who uses investment strategies that go against currently popular investment strategies. They do so because they believe that these popular strategies have caused the stock or other investment to become undervalued or overvalued. George Soros and Sam Zell are well-known contrarian investors.
corporate bond
A debt security issued by a company that is sold to investors. The company makes a legal commitment to pay interest on the principal and, in most cases, to return the principal when the bond comes due. Corporate bonds are considered riskier than government bonds.
data analytics
The process of analyzing data to find useful relationships or patterns.
deal flow
A measurement of the volume of private equity transactions that have closed in a certain period of time.
distressed securities investing
Investment strategy focusing on troubled or restructuring companies at deep discounts through stocks, fixed income, bank debt, or trade claims. Seeks to exploit possible pricing inefficiencies caused by the lack of large institutional investor participation.
distribution
The process of returning capital to limited partners following a liquidity event.
Dow Jones Industrial Average
This is a price-weighted average of 30 actively traded blue chip stocks, primarily industrials. The 30 stocks are chosen by the editors of The Wall Street Journal (which is published by Dow Jones & Company), a practice that dates back to the beginning of the century. The Dow is computed using a price-weighted indexing system, rather than the more common market cap-weighted indexing system.
dry powder
The unused money a private equity firm has on hand to make deals.
due diligence
The process of investigating a company before investing in it. It typically includes calling references, contacting customers, investigating competitors, validating legal contracts, visiting remote locations, coordinating with other investors, interviewing the entire management team, testing the technology, building spreadsheets, and running sensitivity analyses on the projections to see if they make sense, etc.
endowments
A permanent fund bestowed upon an individual or institution, such as a university, museum, hospital, or foundation, to be used for a specific purpose.
enterprise value
A measure of a company’s value, which is calculated as market capitalization, including equity and debt interests, less excess cash.
equities
Shares in a corporation issued to investors that represent a claim over a proportion of its assets and profit.
equity
Ownership interest in a corporation in the form of common stock or preferred stock.
evergreen fund
A private equity fund that continues to raise funds and never holds a final close. Private equity firms do so in order to have access to constant cash flows.
exit
This is a liquidity event, or series of events, that allows a private equity firm to turn the equity it owns in a company back into cash. That event is usually a sale of the company to a larger corporation, or an IPO that permits the firm to sell its shares.
exit strategy
A private equity fund’s plan for liquidating its holdings while achieving the maximum possible return. These strategies will depend on various factors, such as future market conditions and industry trends. Exit strategies can include selling the company’s shares after an IPO or selling the company.
family office
A firm that manages investments, assets, and trusts for a high-wealth family.
final close
The completion of a general partner’s fundraising for a particular fund.
foundation
A nonprofit organization in which wealth generated by individuals or private organizations is used for the public good. Large foundations are major contributors to private equity funds.
fund
The pool of money a private equity firm raises to invest.
fund of funds
An investment partnership that invests in private equity funds.
fundraising
The process by which a general partner at a private equity firm solicits capital commitments from limited partners.
general partner
Managing partner of a limited partnership, who is responsible for the operation of the limited partnership. The general partner’s liability is unlimited since he or she is responsible for the debts of the partnership and assumes legal obligations (i.e., could be sued).
greenmail
Often seen in hostile takeovers, greenmail is a term used to describe a situation where a large block of stock is held by a hostile corporate shareholder, thereby forcing the target of the takeover to pay a substantial premium to repurchase the stock, or face imminent takeover.
growth capital
A type of private equity investment in a mature company that is seeking to expand or improve its business in some way without losing ownership control.
hedge fund
A private, unregistered investment pool encompassing all types of investment funds, companies and private partnerships that can use a variety of investment techniques such as borrowing money through leverage, selling short, derivatives for directional investing, and options.
IPO
An initial public offering is often referred to as an “IPO.” This is first sale of stock by a company to the public.
institutional investor
Large organizational entities with significant amounts of money to invest and high-level investment expertise; common examples are unit trusts, pension funds, and insurance companies.
investment return
The profit or loss on an investment over a certain period of time.
J-curve
The curve created by plotting the returns generated by a private equity firm from inception to termination. Negative returns in a fund's early years before it becomes profitable tend to creat a "J" shape.
leverage
Leverage measures the amount of assets being funded by each investment dollar. The primary source of leverage is from borrowing from financial institutions. Leverage is essentially borrowing by private equity funds using their assets in the fund as a pledge of collateral toward the loan.
leveraged buyout
The acquisition of a business using mostly debt and a small amount of equity. The debt is secured by the assets of the business. The company being acquired generally expects its future cash flows to cover loan payments.
limited partnership
The private equity fund is organized with a general partner, who manages the business and assumes legal debts and obligations, and one or more limited partners, who are liable only to the extent of their investments. Limited partners also enjoy rights to the partnership’s cash flow, but are not liable for company obligations.
liquidation
The sale of all of a company’s assets prior to the final cessation of operations.
liquidity event
A financial transaction in which owners of a large portion of the shares of a private company sell their shares in exchange for cash or shares in an often larger company.
loan-to-own strategy
A strategy in which a private equity firm buys the distressed debt of a company hoping that the borrower will default so that it can take ownership of the company.
lockup
Time period that initial investment cannot be redeemed from the fund.
alternative investing
Private equity falls under the category of alternative investments and may be referred to as such. The “alternative investing” category encompasses other private investments such as hedge funds and real estate. Mainstream investing refers mainly to mutual funds or other investments that everyone can invest in (without needing a certain net worth to do so).
artificial Intelligence
The concept of programming computers and other technology to perform functions and tasks in a “smart” manner that mimics human decision-making processes.
asset classes
Asset class means a type of investment, such as stocks, bonds, real estate, or cash.
assets under management (AUM)
The net asset value of private equity investments or of other investment firms.
bear market
A time in which the prices of stock in the market are falling or are expected to fall.
blockchain technology
A distributed ledger database that maintains a continuously-growing list of financial records that cannot be altered.
bull market
A time in which the prices of stock in the market are rising or are expected to rise.
buy, strip, and flip
A situation in which a private equity firm buys out a target firm (usually with a leveraged buyout) and then sells the target firm in an IPO within a short period of time.
buyout
A transaction in which a private equity firm acquires a significant amount of equity in a business.
capital
Money or assets owned by a private equity firm that can be used in its investment activities.
capital overhang
The current amount of capital that is available to private equity investors.
Chapter 7
The section of the U.S. Bankruptcy Code that details the process for asset liquidation.
Chapter 11
The section of the U.S. Bankruptcy Code that details the process for asset reorganization.
chartered financial analyst
An individual who has passed tests in economics, accounting, security analysis, and money management, administered by the CFA Institute. Such an individual is also expected to have at least four years of investment-related experience, and meet certain standards of professional conduct. These individuals have an extensive economic and investing background and are competent at a high level of analysis. Individuals or corporations utilize their services as security analysts, portfolio managers, or investment advisors.
closed fund
A private equity fund that has concluded accepting financial commitments from limited partners.
contrarian investor
A type of investor who uses investment strategies that go against currently popular investment strategies. They do so because they believe that these popular strategies have caused the stock or other investment to become undervalued or overvalued. George Soros and Sam Zell are well-known contrarian investors.
corporate bond
A debt security issued by a company that is sold to investors. The company makes a legal commitment to pay interest on the principal and, in most cases, to return the principal when the bond comes due. Corporate bonds are considered riskier than government bonds.
data analytics
The process of analyzing data to find useful relationships or patterns.
deal flow
A measurement of the volume of private equity transactions that have closed in a certain period of time.
distressed securities investing
Investment strategy focusing on troubled or restructuring companies at deep discounts through stocks, fixed income, bank debt, or trade claims. Seeks to exploit possible pricing inefficiencies caused by the lack of large institutional investor participation.
distribution
The process of returning capital to limited partners following a liquidity event.
Dow Jones Industrial Average
This is a price-weighted average of 30 actively traded blue chip stocks, primarily industrials. The 30 stocks are chosen by the editors of The Wall Street Journal (which is published by Dow Jones & Company), a practice that dates back to the beginning of the century. The Dow is computed using a price-weighted indexing system, rather than the more common market cap-weighted indexing system.
dry powder
The unused money a private equity firm has on hand to make deals.
due diligence
The process of investigating a company before investing in it. It typically includes calling references, contacting customers, investigating competitors, validating legal contracts, visiting remote locations, coordinating with other investors, interviewing the entire management team, testing the technology, building spreadsheets, and running sensitivity analyses on the projections to see if they make sense, etc.
endowments
A permanent fund bestowed upon an individual or institution, such as a university, museum, hospital, or foundation, to be used for a specific purpose.
enterprise value
A measure of a company’s value, which is calculated as market capitalization, including equity and debt interests, less excess cash.
equities
Shares in a corporation issued to investors that represent a claim over a proportion of its assets and profit.
equity
Ownership interest in a corporation in the form of common stock or preferred stock.
evergreen fund
A private equity fund that continues to raise funds and never holds a final close. Private equity firms do so in order to have access to constant cash flows.
exit
This is a liquidity event, or series of events, that allows a private equity firm to turn the equity it owns in a company back into cash. That event is usually a sale of the company to a larger corporation, or an IPO that permits the firm to sell its shares.
exit strategy
A private equity fund’s plan for liquidating its holdings while achieving the maximum possible return. These strategies will depend on various factors, such as future market conditions and industry trends. Exit strategies can include selling the company’s shares after an IPO or selling the company.
family office
A firm that manages investments, assets, and trusts for a high-wealth family.
final close
The completion of a general partner’s fundraising for a particular fund.
foundation
A nonprofit organization in which wealth generated by individuals or private organizations is used for the public good. Large foundations are major contributors to private equity funds.
fund
The pool of money a private equity firm raises to invest.
fund of funds
An investment partnership that invests in private equity funds.
fundraising
The process by which a general partner at a private equity firm solicits capital commitments from limited partners.
general partner
Managing partner of a limited partnership, who is responsible for the operation of the limited partnership. The general partner’s liability is unlimited since he or she is responsible for the debts of the partnership and assumes legal obligations (i.e., could be sued).
greenmail
Often seen in hostile takeovers, greenmail is a term used to describe a situation where a large block of stock is held by a hostile corporate shareholder, thereby forcing the target of the takeover to pay a substantial premium to repurchase the stock, or face imminent takeover.
growth capital
A type of private equity investment in a mature company that is seeking to expand or improve its business in some way without losing ownership control.
hedge fund
A private, unregistered investment pool encompassing all types of investment funds, companies and private partnerships that can use a variety of investment techniques such as borrowing money through leverage, selling short, derivatives for directional investing, and options.
IPO
An initial public offering is often referred to as an “IPO.” This is first sale of stock by a company to the public.
institutional investor
Large organizational entities with significant amounts of money to invest and high-level investment expertise; common examples are unit trusts, pension funds, and insurance companies.
investment return
The profit or loss on an investment over a certain period of time.
J-curve
The curve created by plotting the returns generated by a private equity firm from inception to termination. Negative returns in a fund's early years before it becomes profitable tend to creat a "J" shape.
leverage
Leverage measures the amount of assets being funded by each investment dollar. The primary source of leverage is from borrowing from financial institutions. Leverage is essentially borrowing by private equity funds using their assets in the fund as a pledge of collateral toward the loan.
leveraged buyout
The acquisition of a business using mostly debt and a small amount of equity. The debt is secured by the assets of the business. The company being acquired generally expects its future cash flows to cover loan payments.
limited partnership
The private equity fund is organized with a general partner, who manages the business and assumes legal debts and obligations, and one or more limited partners, who are liable only to the extent of their investments. Limited partners also enjoy rights to the partnership’s cash flow, but are not liable for company obligations.
liquidation
The sale of all of a company’s assets prior to the final cessation of operations.
liquidity event
A financial transaction in which owners of a large portion of the shares of a private company sell their shares in exchange for cash or shares in an often larger company.
loan-to-own strategy
A strategy in which a private equity firm buys the distressed debt of a company hoping that the borrower will default so that it can take ownership of the company.
lockup
Time period that initial investment cannot be redeemed from the fund.
management buyout
The leveraged takeover of a company by its existing management.
market capitalization
A method of determining the value of a publicly traded company in which the number of outstanding shares is multiplied by the current price of the stock.
middle market
Companies with an enterprise value of approximately $25 million to $1 billion.
pension fund
A fund established by an employer that manages retirement investment contributions made by employees and the employer.
placement agency
A third-party firm that identifies potential investors for private equity funds.
platform company
An initial investment made by a private equity firm in an area (medical technology, department store, etc.) in which it did not have a previous presence. The PE firm uses the platform company as a starting point for future investment in that sector.
portfolio company
A business that has received an equity investment from a private equity firm.
public-to-private transaction
Occurs when a private equity firm buys out all the shares of a publicly traded company in order to take it private.
Securities and Exchange Commission (SEC)
The primary federal regulatory agency for the securities industry, whose responsibility is to promote full disclosure and to protect investors against fraudulent and manipulative practices in the securities markets. The Securities and Exchange Commission enforces, among others, the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, and the Investment Advisers Act. The SEC is an independent, quasi-judiciary agency. It has five commissioners, each appointed for a five-year term that is staggered so that one new commissioner is being replaced every year. See http://www.sec.gov.
road show
A common aspect of the private equity fundraising and IPO process during which representatives of a PE firm present financial opportunities to potential investors in various cities.
secondary market
A market for the sale of partnership interests from one limited partner to another. Limited partners often sell some of their holdings to raise cash or as a strategy to adjust their asset allocation.
seed money
Initial funding of a start-up business provided by angel investors. Seed money can take the form of a loan, an investment in preferred stock or convertible bonds, or of common stock, providing the startup with capital needed for early stage development and growth.
sovereign wealth funds
A country-owned pool of money that is invested in various financial assets.
strategic acquisition
An investment made by a large company in a smaller company to gain access to new products, technology, or services that will help it achieve its strategic goals.
transaction fees
Fees charged by private equity firms to the companies they acquire for consulting, management, and other services. Also known as monitoring fees.
transparency
Transparency refers to the amount of financial disclosure that private equity fund managers have to give to their investors and the SEC.
venture capital
The process of investing in start-up or early-stage companies that have undeveloped or developing products or revenue.
vintage
The first year in which a fund is launched (i.e., the starting point of the investment period).
zombie fund
A private equity fund that has not raised capital nor executed a buyout in many years.