Private Equity Glossary

Contractual provisions that protect investors from the dilution of their ownership stake in subsequent financing rounds at lower valuations. Anti-dilution protections adjust the conversion price or issue additional shares to maintain the investor's proportional ownership.

A notice issued by a fund's general partner to limited partners requiring them to contribute a portion of their committed capital. Capital calls are typically made when the fund identifies an investment opportunity or needs to cover management fees and expenses.

The share of profits that the general partner receives as compensation, typically 20% of fund profits above a specified hurdle rate. Carry aligns the GP's interests with those of the LPs and is the primary performance-based incentive for fund managers.

A provision requiring the general partner to return previously distributed carry if the fund's overall performance fails to meet the specified return threshold by the end of the fund's life. The clawback ensures that GPs earn carry only on the fund's aggregate performance, not on individual deals.

A direct investment made by limited partners alongside a private equity fund in a specific portfolio company. Co-investments typically carry reduced or no management fees and carried interest, providing LPs with additional exposure to attractive deals at lower cost.

The time window during which a PE fund's general partner can make new investments, typically the first 3-5 years of the fund's life. After the commitment period expires, the GP can only make follow-on investments in existing portfolio companies.

An investment made directly into a company without going through a fund structure. Direct investments give the investor full control over deal selection and terms but require significant in-house deal sourcing and operational capabilities.

A valuation method that estimates the present value of an investment based on its expected future cash flows, discounted at an appropriate rate. DCF analysis is a fundamental tool in PE for assessing the intrinsic value of potential acquisition targets.

The return of capital and profits from a PE fund to its limited partners. Distributions can take the form of cash proceeds from the sale of portfolio companies or, less commonly, in-kind distributions of securities.

A performance metric that measures the cumulative distributions returned to investors relative to the total capital they have contributed to the fund. A DPI of 1.0x means LPs have received back their entire investment; above 1.0x indicates profit has been distributed.

Provisions that enable majority shareholders to force minority shareholders to join in the sale of a company, typically on the same terms and conditions. Drag-along rights prevent minority holdouts from blocking transactions approved by the majority.

The amount of committed but undeployed capital available to private equity funds for future investments. High levels of dry powder across the industry can signal increased competition for deals and potential upward pressure on entry valuations.

The thorough investigation and analysis of a target company conducted before completing an acquisition. Due diligence typically covers financial, legal, commercial, operational, and environmental aspects to identify risks and validate the investment thesis.

A contractual provision in which the seller of a business receives additional future payments contingent on the company achieving specified performance targets after the acquisition. Earnouts help bridge valuation gaps between buyers and sellers.

Earnings Before Interest, Taxes, Depreciation, and Amortization—a widely used proxy for operating cash flow in PE valuations. EBITDA multiples are the most common valuation metric for buyout transactions, allowing comparison across companies with different capital structures.

The total value of a company, calculated as market capitalization plus net debt minus cash. Enterprise value represents the theoretical takeover price and is the basis for EV/EBITDA multiples commonly used in PE deal pricing.

A portion of the purchase price held by a neutral third party for a specified period after closing to cover potential indemnification claims. Escrow accounts protect the buyer against breaches of representations and warranties discovered after the transaction closes.

The total duration of a PE fund from initial close to final liquidation, typically 10-12 years with possible extensions. The fund life encompasses the investment period, holding period, and exit/harvest period during which all portfolio investments are realized.

An investment vehicle that allocates capital across multiple PE funds rather than investing directly in companies. Fund of funds provide diversification across managers, strategies, and vintage years, making PE accessible to smaller institutional investors.

The entity responsible for managing a PE fund, making investment decisions, and overseeing portfolio companies. The GP typically contributes 1-5% of total fund capital and receives management fees and carried interest as compensation.

The capital contributed by the general partner to their own fund, typically 1-5% of total fund size. GP commitment aligns the fund manager's interests with those of limited partners by ensuring the GP has meaningful capital at risk.

A type of PE investment that targets minority or majority stakes in established, profitable companies with high growth potential. Growth equity investments typically use little to no leverage and focus on organic expansion, market share gains, and operational scaling.

The minimum rate of return that a PE fund must achieve before the general partner can begin receiving carried interest, typically set at 8% annually. The hurdle rate ensures that LPs receive a preferred return on their invested capital before profit sharing begins.

The time frame during which the general partner actively deploys the fund's committed capital into new investments, typically the first 3-5 years. Synonymous with commitment period in most fund structures.

The annualized rate of return that equates the present value of all cash inflows with the present value of all cash outflows in an investment. IRR is the most widely used return metric in PE and accounts for the timing and magnitude of cash flows.

The characteristic pattern of PE fund returns over time, where early years show negative returns due to management fees, fund expenses, and unrealized losses on new investments, before inflecting upward as portfolio companies mature and are exited. The shape of cumulative returns resembles the letter J.

The acquisition of a company using a significant amount of borrowed money (debt) to fund the purchase price. The target company's assets and cash flows typically serve as collateral for the debt, allowing PE firms to amplify equity returns.

An investor in a PE fund who provides capital but has limited involvement in fund management and investment decisions. LPs include pension funds, sovereign wealth funds, endowments, insurance companies, family offices, and high-net-worth individuals.

A transaction in which a company's existing management team, often backed by a PE sponsor, acquires a controlling ownership stake. MBOs rely on management's deep knowledge of the business and align incentives for post-acquisition value creation.

An annual fee paid by LPs to the GP for fund management, typically 1.5-2.0% of committed capital during the investment period and invested capital thereafter. Management fees cover the GP's operating expenses including salaries, rent, and deal sourcing costs.

A return metric that measures the total value generated relative to the amount of capital invested, expressed as a multiple. A 2.5x MOIC means the investment returned 2.5 times the original capital invested. Unlike IRR, MOIC does not account for the time value of money.

An increase in the valuation multiple (e.g., EV/EBITDA) at which a company is valued between acquisition and exit. Multiple expansion is one of three primary value creation levers in PE, alongside revenue growth and margin improvement.

The estimated fair market value of a fund's portfolio of investments minus any liabilities, reported periodically (usually quarterly) to LPs. NAV is used to calculate unrealized returns and is a key input for TVPI and RVPI calculations.

A benchmarking methodology that compares PE fund returns to what would have been earned by investing the same cash flows in a public market index. PME enables a like-for-like comparison of PE performance against liquid public market alternatives.

The total estimated value of a company immediately after a new round of financing. Post-money valuation equals the pre-money valuation plus the new capital raised, and is used to determine the investor's ownership percentage.

The estimated value of a company immediately before a new round of financing. Pre-money valuation is a critical negotiation point in investment transactions as it directly determines how much equity investors receive for their capital.

An alternative asset class consisting of capital invested in private companies or used to take public companies private. PE firms raise funds from institutional investors and high-net-worth individuals, investing in companies to create value through operational improvements, strategic repositioning, and financial engineering.

Statements of fact and promises made by the seller in an acquisition agreement regarding the condition and attributes of the business being sold. Reps and warranties cover areas such as financial statements, legal compliance, employee matters, and material contracts.

A performance metric measuring the net asset value of a fund's remaining portfolio relative to the total capital contributed by investors. RVPI represents the unrealized value still held in the fund and, combined with DPI, equals TVPI.

Provisions that allow minority shareholders to join a transaction when majority shareholders sell their stake, ensuring they can exit on the same terms and conditions. Tag-along rights protect minority investors from being left behind in a sale.

A non-binding document outlining the key terms and conditions of a proposed investment or acquisition. Term sheets cover valuation, governance rights, liquidation preferences, and other material deal terms, serving as the basis for definitive legal documentation.

The most complete return metric in PE, measuring the total value of a fund (distributions plus remaining NAV) relative to total capital contributed. TVPI equals DPI plus RVPI, capturing both realized and unrealized returns in a single measure.

A form of private equity focused on early-stage, high-growth-potential companies, typically in technology and life sciences sectors. VC investors provide capital in exchange for equity stakes and active board involvement, accepting higher risk in pursuit of outsized returns.

The year in which a PE fund makes its first investment or holds its initial closing. Vintage year is critical for benchmarking because macroeconomic conditions at the time of deployment significantly influence fund returns.

The hierarchical structure governing how fund profits are distributed between LPs and the GP. The waterfall typically includes return of contributed capital, preferred return (hurdle rate), GP catch-up, and then a carried interest split, ensuring LPs are prioritized before the GP earns carry.