| Acquisition |
obtaining, usually by purchase, control or ownership of another company. |
| Annual Management Charge |
a fee paid every year to the manager for running a fund, usually a percentage of the amount invested |
| AIC |
Association of Investment Companies, the trade body for investment companies. Prior to 1 October 2006, this was the Association of Investment Trust Companies (AITC)
website: www.theaic.co.uk
|
| Business angel |
a private investor who finances very small or start-up companies and sometimes provides them with the benefit of his/her expertise |
| Business plan |
the document which outlines the plan for funding, containing strategy, summaries of past and projected profit and loss accounts, balance sheets, cash flows, details of products or services, analysis of markets, profiles of managers and any other relevant information |
| Buy & Build |
a strategy deployed mainly in mid-market buy-outs, whereby a single company or small group is bought by the private equity investor and developed through a series of bolt-on acquisitions. Also referred to as a platform deal |
Buy-out/
buy-in |
see management buy-out, leveraged buy-out and management buy-in |
| BVCA |
the British Venture Capital Association, the trade body for the UK private equity industry
website: www.bvca.co.uk
|
| C shares (conversion shares) |
class of share issue by investment trusts which allows them to increase the number of shares in issue and funds under management without reducing the value of existing shares. C shares are quoted separately from the ordinary shares until the money raised from their issue has been fully invested. The holders of the C shares are then offered ordinary shares at the combined NAV of the enlarged trust |
| Capital |
money for investment, or which has already been invested |
| Capital gearing |
when an investment trust borrows money to increase its exposure to a particular market |
| Capital structure |
the different amounts and types of capital (e.g. ordinary shares, preference shares, debentures, bank loans) that comprise a company's capital |
| Captive funds |
funds managed by dedicated private equity teams within banks. These funds usually attract a significant proportion of their capital from the parent bank |
| Carried interest |
the share in the proceeds of sale of an investee company or fund that is retained by the private equity fund manager as a performance fee if the investment has performed well |
| Cash drag |
uninvested portion of a portfolio which hampers performance compared to benchmarks in rising markets. Often occurs as private equity investment trusts retain proceeds of realisations in the trust awaiting new investment opportunities |
| Closed end fund |
an investment vehicle, such as an investment trust, with a fixed capital structure. Variations in demand for the shares of the fund are therefore reflected in the share price and not by an expansion or contraction of supply |
| Collective investment |
investments such as unit trusts or investment trust schemes where a number of investors put money into a single investment scheme which then invests in a number of entities on their behalf |
| Convertible loan stock |
fixed interest loans which may be converted into ordinary shares at a future date |
| Corporate venturing |
the practice of a large company taking equity stakes (often a minority) in smaller businesses, usually for strategic reasons. Sometimes this is in the form of a joint venture to which the larger company brings finance as well as distribution outlets and management expertise in exchange for accessing the product or technology of the younger business |
| Deal flow |
the rate at which investment proposals come to a private equity fund manager |
| Debenture |
a loan raised by a company, paying a fixed rate of interest and secured on the assets of the company |
| Development capital |
finance supplied to established, profitable companies that require capital to develop further, organically and/or through acquisition, to the stage where they will be able to float or be acquired by a major company |
| Discount |
an investment trust is said to be trading at a discount if the share price of the investment trust is lower than net asset value per share. The discount is shown as a percentage of the net asset value |
| Dividend |
the income received by shareholders in a company, if it is company policy to pay dividends. The dividend payment is set by the board of directors and approved by shareholders |
| Drawdown |
when a private equity firm has decided where it would like to invest, it will approach its investor to drawdown the money already committed to the fund; this is the act of transferring the money |
| Due diligence |
detailed analysis and appraisal of everything relating to a potential investment transaction: finances, market, management, business plan, environmental issues, etc. Often carried out with the help of professional advisers |
| Earn out |
either a formula for relating the final purchase price of a company to actual future earnings or a means of encouraging management to perform by payment on the basis of future performance |
| Equity |
shares in a company |
| EVCA |
the European Private Equity & Venture Capital Association, the European trade body for private equity that represents the industry at European and worldwide level, working alongside the national trade associations
website: www.evca.com |
| Evergreen |
continually investing, rather than having a fixed-life span |
| Exit |
the point at which the private equity investor sells the holding in an investee company, through a trade sale to a larger company, by sale to the management, by sale to another private equity firm (see secondary buy-out) or by flotation |
| Expansion capital |
funding for companies that have achieved revenues but are not usually making a profit |
| Fixed interest |
generally refers to bonds or similar debt instruments on which the holder receives a pre-determined rate of interest |
| Flotation |
when a company first offers its shares for sale on the quoted markets. Also sometimes called an Initial Public Offering (IPO) |
| Financial Services Authority (FSA) |
the single statutory regulator responsible for regulating deposit taking, insurance and investment business, including private equity fund managers
website: www.fsa.gov.uk |
| Fund-of-funds |
a fund or a trust that invests in other funds or trusts. In private equity, a fund-of-funds is either (a) a type of institutional investor, raising money from pension funds and other institutions, or (b) a listed fund such as a PEIT |
| Gearing or leverage |
the ratio of debt to equity in a company’s capital structure. Intermediate forms of capital, such as redeemable preference shares and convertible loans, are generally regarded as debt for gearing purposes |
| General Partner (GP) |
the manager of a Limited Partnership private equity fund. More usually referred to as the private equity fund manager or firm |
| Hands on/hands off |
the degree to which an investor becomes involved in the management of the investee company |
| Hurdle rate |
in private equity, this is the level of basic return set by institutional investors in private equity funds, above which managers can claim an agreed percentage of carried interest in a deal or a fund and below which they cannot. In investment trusts, it is the rate at which a trust’s net asset value has to grow before a performance fee is paid |
| Independent funds |
funds raised directly from institutional investors by private equity fund management firms that are not part of a larger financial group |
| Initial Public Offering (IPO) |
see flotation |
| Individual Savings Account (ISA) |
a savings account that allows the individual to save in cash, equities (bonds, gilts and shares) and life insurance policies without paying income or capital gains tax on any gains made at sale |
| Institutional investor |
pension fund, insurance company, bank or other financial institution that invests money managed on behalf of others |
| Internal rate of return (IRR) |
generally, the term refers to the annual compound rate of return to the investor over a given period. Different investors calculate this in different ways although the industry generally follows guidelines laid down by EVCA and national associations. Returns normally include dividend and interest distributions and proceeds from disposals or a fair valuation of the company if unrealised |
| Investment trust |
a listed company that invests in other companies. The difference between investment trusts and unit trusts is that unit trusts are open-ended and continually receive funds for investing in the market whereas investment trusts are closed-ended, with a fixed amount of capital, divided into shares. Investment trusts can borrow money to invest if necessary. Investment trusts are subject to company law, the FSA’s Listing Rules and the rules of the London Stock Exchange |
| Junior debt |
unsecured loans which rank after secured or senior debt for repayment in the event of default |
| J-curve |
the curve generated when a private equity fund starts to invest or generated in the initial period of investment in a company when the impact of initial management fees and other initial costs on the first drawdown produce a negative return. As the first investments from the portfolio begin to increase in value (e.g. through refinancing or disposal), the fund value will start to rise steeply. The J-curve period is generally shorter for buy-out funds and longer for early stage funds |
| Junk bonds |
high yielding, unsecured debt used typically in US buy-outs. In the form of a bond certificate, junk can be bought and sold more easily than mezzanine debt |
| Lead investor |
private equity investor who either wins the mandate for, or invests the most in, a syndicated investment |
| Leverage |
see Gearing |
| Leveraged buy-out (LBO) |
a management buy-out or buy-in in which the transaction will have been initiated by the private equity firm or financial advisers rather than by management |
| Limited Partners (LPs) |
see Limited Partnership |
| Limited Partnership |
the legal structure of most private equity funds, usually comprising a 10 year fixed-life investment vehicle managed by General Partners with the Limited Partners being the investors. Limited Partners have limited liability and are not involved in the day-to-day management of the fund but receive regular and detailed reports on the holdings in the fund |
| Lock-out agreement |
an agreement to give a buy-out team time to negotiate the sale of their company free of pressure from other bidders |
| Lock-up agreement |
an agreement by certain shareholders in a company to refrain from selling their shares in the public market for a specified period (the lock-up period) after the company has had a public offering. |
| Management buy-in (MBI) |
the purchase of a business by private equity investors together with one or more outside managers. The managers sometimes put up some of the finance and gain a share of the equity |
| Management buy-out (MBO) |
the purchase of a business by private equity investors with some or all of the existing management. The managers put up some of the finance and gain a share of the equity |
| Management fees |
compensation received by a private equity fund’s managers, usually equal to an agreed percentage of the initial commitments to a fund |
| Mezzanine finance/debt |
loans, usually unsecured, which rank after secured or senior debt but before equity in the event of the company defaulting. To compensate for the greater risk, these loans usually carry interest one or two percentage points above secured loans and an equity “kicker”, which gives the lender a stake in the equity |
| Net asset value (NAV) |
the total value of a company’s assets less its liabilities, usually expressed in pence per share. The net worth of an investment trust’s equity capital is arrived at by totaling the value of the trust’s listed investments at mid market prices, unlisted investments at directors’ valuation, together with cash and other net current assets, and deducting all liabilities. Shares can trade at a discount or a premium to NAV |
| Open end fund |
investment funds where the number of units in issue varies from day to day, such as unit trusts |
| Platform deal |
see Buy & Build |
| Preferred Ordinary Shares |
refers to the ordinary shares taken up by outside investors in a buy-out. They rank ahead of plain ordinary shares owned by management in terms of dividends and the payout in the event of a winding-up of the company |
| Premium |
an investment trust is said to be trading at a premium if the share price of the investment trust is higher than net asset value per share. The premium is shown as a percentage of the net asset value |
| Private Placement |
the sale of shares not available to the public to institutional investors |
| Public to Private |
when a private equity investor buys the shares of a public company, thus taking it from public into private ownership |
| Ratchet |
an incentive arrangement whereby managers receive a larger share of the equity if the company performs well. These can work the other way, with managers’ shares of the equity decreasing |
| Refinancing |
changing a company’s level of debt, often increasing it to replace equity and thus a way of recouping capital for private equity investors |
| Second round financing |
common in venture stage companies which often need four or five rounds of finance to help them develop and referred to respectively as Series B, C etc. Less common in buy-outs |
| Secondary buy-out |
a buy-out that is sold on to another private equity firm, usually because the second firm has different skills or a wider geographic presence which fit the aspirations of the investee company for further growth. |
| Secondaries transaction |
where an institutional, corporate or fund-of-funds investor in private equity funds sells part or all of their portfolio of individual fund holdings to another institutional or corporate investor or fund-of-funds. There are funds raised specifically to buy secondaries transactions, known as secondary funds. These are quite separate from and unrelated to secondary buy-outs |
| Seed capital |
capital for companies that are still developing a product or service |
| Senior debt |
secured debt which ranks first in terms of repayments in the event of default |
| Shares |
shares are issued by companies to raise money. Unlike bonds, which are straightforward loans, shares give ownership of a company – they have less security than debt but greater potential rewards |
| Splits (Split Capital Investments) |
a split capital trust is an investment trust company with more than one class of share, each class having different rights to participate in income or capital returns. Splits have a fixed life span – on average seven years – at the end of which they are wound up or rolled over into a new fund. The three main share classes in splits are zero dividend preference shares, income shares and capital shares. Zeros pay no dividends, paying a pre-established redemption price at the redemption date, provided there are sufficient assets in the trust. Income shares entitle the shareholder to regular dividends payable from the assets of the trust in its lifetime. Capital shares do not pay dividends and have no predetermined value; capital shareholders receive a share in the remainder of the assets of the trust on winding up once the prior interests of lenders, zero holders and income shareholders have been met. Individual trusts can have two or more classes of share in different combinations |
| Start-up |
a company that has developed a product or service but not yet taken it to market and may not have a complete management team in place |
| Syndicated investment |
an investment which is too large to be undertaken by one fund on its own and which is therefore shared among several private equity funds |
| Trade sale |
the sale of an investee company to another company in the same sector as opposed to a financial institution |
| Vendor finance |
finance provided by the vendor of a company in the form of either a deferred payment or a retained minority stake in the bought-out company |
| Venture capital trust (VCT) |
a collective investment portfolio comprising holdings in unlisted companies – typically early stage companies – or AIM stocks |
| Yield |
the annual return received from holding a stock, share or unit trust, expressed as a percentage of its price |
