Glossary

The terms of private markets as they turn up in the news — fund economics, fundraising, a fund’s life, structures, deals, and the rules — each defined in a sentence, with an example and why it matters.

A to Z, by group

88 terms

Fund economics

American waterfall: An American, or deal-by-deal, waterfall lets the manager earn carry on each sale as it happens, usually after investors recover that deal’s cost and a share of fees.
Carried interest: Carried interest is the share of a fund’s profits, typically 20%, that the manager earns after investors get their money back and clear the preferred return.
Clawback: A clawback makes a manager return carried interest it was paid early, if later losses mean it received more than its agreed share of the fund’s total profit.
Distribution waterfall: A distribution waterfall is the order a fund pays out proceeds: investors’ capital, then the preferred return, then the manager’s catch-up, then the split of what remains.
European waterfall: A European, or whole-fund, waterfall pays the manager carry only after investors have received all their paid-in capital, plus the preferred return, across the entire fund.
Fee step-down: A fee step-down lowers the management fee once the investment period ends, often by moving the fee base from committed capital to the cost of investments still held.
GP catch-up: The catch-up is the part of a fund’s waterfall, after the hurdle, where the manager takes most or all distributions until it holds its full share of the profit.
GP commitment: The GP commitment is the money a manager and its partners invest in their own fund alongside investors, often a few percent of the fund’s total.
Hurdle rate: A hurdle rate, or preferred return, is the minimum yearly return, often 8%, that investors must receive before the manager can start earning carried interest.
ILPA: ILPA is the Institutional Limited Partners Association, an industry body of investors that publishes best-practice principles on fund terms, fee reporting and governance.
Key person: A key person clause lets investors pause new investments, or sometimes end the fund’s investing, if named senior people leave or stop giving the fund enough of their time.
LPA: The limited partnership agreement, or LPA, is a private fund’s main contract. It sets the fees, carry, investment limits and the rights of the manager and the investors.
LPAC: The LPAC, or limited partner advisory committee, is a small group of investors that advises the manager and usually approves conflicts of interest and certain term waivers.
Management fee: The management fee is the annual charge investors pay a manager to run a fund, often 1% to 2% of committed capital during the investment period.
Management fee offset: A fee offset reduces the management fee by some or all of the transaction, monitoring or director fees the manager collects from the companies a fund owns.
MFN clause: A most favored nation clause lets an investor choose terms the manager has given other investors in side letters, usually those given to investors with similar or smaller commitments.
No-fault removal: No-fault removal lets a set share of investors, usually a supermajority, remove the manager or end the fund’s investing without having to prove it did anything wrong.
Side letter: A side letter is a separate agreement between a manager and one investor that gives that investor terms beyond the fund’s main documents, such as lower fees or extra reporting.

Fundraising

Anchor investor: An anchor investor is a large early backer that commits a big amount to a new fund, helping it get started and often receiving better terms for doing so.
Commitment: A commitment is the total amount an investor legally agrees to provide to a fund, which the manager draws down gradually through capital calls.
DDQ: A due diligence questionnaire, or DDQ, is the standard list of questions investors send a manager to assess its team, process, controls and compliance.
Final close: A final close is when a fund stops accepting new investors. Its commitments are locked and its size is set.
First close: A first close is the first time a fund accepts investors’ commitments and gets going, even though it keeps raising money toward its full target.
Fund of funds: A fund of funds pools investors’ money to invest in other private funds rather than directly in companies, which adds a second layer of fees.
General partner: A general partner, or GP, is the firm that runs a fund, makes its investment decisions and carries legal responsibility for it. The term is also used for the manager.
Hard cap: A hard cap is the most a fund’s documents allow it to raise. The manager cannot accept commitments beyond it without changing the terms.
Limited partner: A limited partner, or LP, is an investor in a fund. It supplies most of the capital, takes no part in running it, and typically risks only its commitment.
Placement agent: A placement agent is a firm a manager hires to find and pitch investors for a fund, usually paid a percentage of the capital it brings in.
PPM: A private placement memorandum, or PPM, is the offering document that tells prospective investors about a fund’s strategy, terms, risks and manager.
Re-up: A re-up is when an existing investor commits to a manager’s next fund. Managers and investors watch re-up rates as a sign of investor satisfaction.

Fund life

Capital call: A capital call is a notice asking investors to send part of their commitment, usually a week or two before the money is needed. It is also called a drawdown.
Continuation vehicle: A continuation vehicle is a new fund that buys one or more assets from a manager’s older fund, so existing investors can cash out or roll over.
Distribution in kind: A distribution in kind hands investors a fund’s assets, usually shares of a company that has gone public, instead of paying them cash.
DPI: DPI, distributions to paid-in capital, divides the cash a fund has returned to investors by the cash they paid in. A DPI of 1.0x means they have their money back.
Dry powder: Dry powder is money that investors have committed to funds but managers have not yet invested. Industry-wide, the total is closely watched.
GP-led secondary: A GP-led secondary is a deal run by a fund manager to move assets out of an existing fund, usually into a continuation vehicle, with new investors buying in.
Investment period: The investment period is the first years of a fund, often about five, when the manager can make new investments. Afterward it mostly manages and sells what it holds.
IRR: IRR, internal rate of return, is the yearly return that accounts for when money goes into and comes out of a fund, so earlier payouts raise it.
J-curve: The J-curve is the usual pattern where a fund’s reported returns dip below zero in its early years, because of fees and costs before investments mature, and then climb.
LP-led secondary: An LP-led secondary is a sale by an investor of its stakes in one or more funds to a buyer, often to raise cash or rebalance its portfolio.
MOIC: MOIC, multiple on invested capital, is the total value an investment has returned or still holds, divided by the money put into it. It ignores how long that took.
NAV: Net asset value, or NAV, is a fund’s assets minus its liabilities. In private funds it is usually reported quarterly and rests on the manager’s valuations.
NAV loan: A NAV loan is borrowing by a fund against the value of the investments it already owns, rather than against investors’ unfunded commitments.
Recycling: Recycling lets a fund reinvest proceeds from early sales instead of distributing them, so it can invest more than investors committed, usually up to a stated limit.
RVPI: RVPI, residual value to paid-in capital, divides the value of what a fund still holds by the money investors paid in. It is the unrealized part of the return.
Subscription line: A subscription line is a short-term loan to a fund, backed by investors’ unfunded commitments, that lets the manager invest before calling investors’ cash.
Tender offer: A tender offer is a bid made directly to holders to buy their shares or fund interests at a stated price within a set time window.
TVPI: TVPI, total value to paid-in capital, adds the cash a fund has already returned to the value it still holds, then divides by the money investors paid in.
Vintage year: A fund’s vintage year is usually the year it first called capital or made its first investment. Funds are compared with others from the same vintage.

Structures

BDC: A BDC, or business development company, is a U.S. investment company that lends to or invests in private mid-sized businesses, and typically passes most of its income to shareholders.
Blocker: A blocker is a corporation placed between certain investors and an investment, so those investors, often tax-exempt or foreign, receive dividends instead of pass-through business income.
CLO: A CLO, or collateralized loan obligation, pools hundreds of leveraged loans and funds them by selling slices of debt and equity with different levels of risk.
Co-investment: Co-investment is when investors put money directly into a deal alongside a fund, usually with lower or no fees and no carried interest.
Evergreen fund: An evergreen fund has no fixed end date and lets investors join and redeem on a regular schedule, often quarterly, instead of locking money up for a decade.
Feeder fund: A feeder fund pools investors’ money and invests it all into a larger master fund, often so investors with different tax or legal needs can share one portfolio.
GP stake: A GP stake is a minority ownership in an asset manager itself, giving the investor a share of the manager’s management fees and often of its carried interest.
Interval fund: An interval fund is a registered closed-end fund that offers to buy back a set share of its shares, between 5% and 25%, at regular intervals such as quarterly.
Mezzanine: Mezzanine debt ranks below senior loans and above equity, so it is riskier. It usually pays a higher interest rate, often partly paid in kind, sometimes with equity warrants.
Parallel fund: A parallel fund invests alongside the main fund on the same terms and at the same time, usually for investors with legal or tax needs the main fund cannot meet.
Private credit: Private credit is lending by investment firms rather than banks, directly to companies, with the loans held in funds rather than traded on markets.
Separately managed account: A separately managed account is an arrangement where a manager invests one investor’s money alone, to terms that investor negotiates, instead of in a pooled fund.
SPV: An SPV, or special purpose vehicle, is a separate legal entity set up to hold one investment or deal, keeping its assets and liabilities apart from the sponsor’s.
Unitranche: A unitranche loan combines senior and junior debt into one loan with a single blended interest rate, usually from one direct lender or a small group.

Deals

Add-on acquisition: An add-on is a smaller company that a private equity-owned company buys to grow, folded into the platform company the firm already holds.
Carve-out: A carve-out is the purchase of a division or business unit from a larger company, which then becomes a standalone company.
Club deal: A club deal is an acquisition made jointly by several investment firms, each putting in part of the equity.
Dividend recap: A dividend recapitalization is when a company borrows new debt and uses the money to pay a dividend to its owners, usually a private equity fund.
Down round: A down round is a funding round for a startup at a lower valuation than its previous round.
Earn-out: An earn-out makes part of an acquisition price depend on the business hitting agreed targets after the deal closes.
EBITDA: EBITDA is earnings before interest, taxes, depreciation and amortization, a measure of a company’s operating profit. Buyouts are often priced as a multiple of it.
Enterprise value: Enterprise value is the price of a whole business: the value of its equity plus its net debt, typically. It is what a buyer pays for the company, debt included.
Leveraged buyout: A leveraged buyout, or LBO, buys a company using mostly borrowed money, with the company’s own assets and cash flow backing the debt.
PIK: PIK, or payment in kind, means interest on a loan is added to its balance instead of being paid in cash.
Platform company: A platform is the first company a private equity firm buys in a sector, meant to be built up, often through add-on acquisitions.
Secondary buyout: A secondary buyout is when a private equity firm sells a company it owns to another private equity firm.
Take-private: A take-private is when an investor buys all of a listed company’s shares and delists it, so the company becomes privately owned.

Operations and rules

Accredited investor: An accredited investor is a person or institution that meets SEC income or net worth tests, or holds certain professional licenses, and so may invest in private offerings.
AIFMD: The Alternative Investment Fund Managers Directive is the EU framework for managers of alternative funds. It covers authorization, reporting, risk controls and marketing to investors.
AML and KYC: AML rules aim to stop money laundering. KYC, know your customer, is the checking of who an investor is and where its money comes from before a fund accepts it.
Equalization: In a private fund, equalization is the true-up for investors joining at a later close: they pay as if they had joined at the first, plus interest.
ERISA 25% test: Under the ERISA 25% test, a fund’s assets are generally not treated as plan assets if benefit plan investors hold less than 25% of any class of its equity.
Fair value: Fair value is what an asset would fetch in an orderly sale between willing buyers and sellers on the measurement day. Accounting standards require funds to report it.
Form PF: Form PF is a confidential report that private fund advisers registered with the SEC file on their funds’ size, borrowing, investors and performance, to help regulators monitor risk.
Fund administrator: A fund administrator is an independent firm that keeps a fund’s books, calculates its net asset value, processes capital calls and distributions, and handles investor reporting.
Rule 506(b): Rule 506(b) of Regulation D lets a fund raise unlimited money privately, without general solicitation, from accredited investors and up to 35 sophisticated non-accredited ones.
Rule 506(c): Rule 506(c) of Regulation D lets a fund advertise publicly, but only accredited investors may buy, and the fund must take reasonable steps to verify they are accredited.
Schedule K-1: A Schedule K-1 is the U.S. tax form a partnership, such as a private fund, sends each partner to report that partner’s share of its income, gains and losses.
Side pocket: A side pocket separates hard-to-value or illiquid assets from the rest of a fund, typically a hedge fund, so redemptions do not force a sale of them.

Definitions, not advice; where usage varies the entry says so. A term wrong or missing? Tell the desk.