Glossary
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A
Advisor
Also called Investment Advisor. External person/entity designated by the management company that advises the management company on the purchase and sale of investments and the investment activities of the fund. Of particular relevance when special expertise is required for valuation and/or selection of investments.
Alignment of interest
Describes the (desired) alignment of the intrinsically divergent interests of the sponsor (fund manager) and the investors of a fund through the fund agreement as a compromise bringing these interests as closely together as possible. An example is fund management making an investment in the fund, such that the fund manager has its own funds invested alongside the investors.
Alternative investment fund (AIF)
An alternative investment fund (AIF) is any collective investment undertaking which raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors and which constitutes neither an operative company outside of the financial sector nor an Undertaking for Collective Investments in Transferable Securities (UCITS).
Alternative investment fund manager (AIFM)
Alternative investment fund manager (AIFM) is a company that manages alternative investment funds.
Alternative investment fund managers directive (AIFMD)
Abbreviation of the EU Directive on Alternative Investment Fund Managers (2011/61/EU).
Alternative investments
Alternative investments are those made into any asset class that falls outside of the three traditional ones - stocks, bonds and cash. Private equity and venture capital are two of the main categories within alternative investing. Other alternative investment strategies range from financial assets like cryptocurrencies, derivatives, hedge funds, and distressed securities, to tangible assets including real estate, art, wine, cars, and coins.
Anchor investor
Also called Cornerstone Investor. The central investor of a private equity fund that makes a large capital commitment in an early stage of the fund’s fundraising so as to ensure the fund reaches first close. The investment by an anchor investor in a fund strengthens the fund’s reputation while fundraising. Public investors (such as the EIF) often take on this role, in particular in venture capital funds.
B
Blind pool fund
A blind pool fund is an investment vehicle in which investors commit capital without knowing exactly how that money will be deployed. Instead of pre-selecting and disclosing specific assets or companies, the fund’s manager retains full discretion to identify and execute deals after fundraising is complete.
Buy out fund
A fund generally focusing on acquiring majority stakes in established companies with stable returns and cash flow.
Buy-and-build (roll-up) strategy
Buyout strategies aim to improve or restructure existing businesses that can then grow, often through acquisitions into larger enterprises. This is known as a buy-and-built strategy, also referred to as “roll-up”, “add-on”, or “bolt-on” deals.
C
Cap (small/mid/large Cap)
Abbreviation of “capitalization.” Often used to describe the market segment in which a fund makes investments. A distinction is drawn between the market capitalization of the average portfolio company (small = single millions to tens of millions / mid = tens of millions to hundreds of millions / large = hundreds of millions to billions).
Capital call
Private equity funds intended for institutional investors do not have the subscribed capital amounts paid in full when an investor is admitted to the fund, but instead called down from investors in multiple tranches on an as-needed basis to make investments during the Commitment Period and to cover costs.
Capital structure
Capital structure refers to the way a company finances its overall operations and growth through the use of different sources of funds. In the simplest terms, it is the mix of debt and equity a company uses to fund its business activities.
Carried interest
Carried interest is the capital-disproportionate profit participation of the AIFM in the success of the fund it manages, paid as performance fee-like amounts compensating in particular the rendering of final investment decisions and immaterial shareholder contributions. The typical 20% profit interest of a fund manager exceeds the AIFM’s capital investment (usually 1-3%) and is thus “capital-disproportionate.” The Carried interest is often paid by the fund to a Carry Vehicle of the AIFM.
Cash flow
Accounting concept relating to a company’s liquidity and presenting a balance of all income and expenditures.
Catch up
Term used in the context of the Distribution Waterfall in the fund agreement. The catch up is the name for the stage of the distribution waterfall reached after the investors’ Hurdle has been exceeded, when the fund manager receives subsequent distributions (thus “catching up” after previous stages in which all distributions were paid to the investors) until the agreed carried interest profit distribution (typically 80% to investors and 20% to the fund manager) has been reached.
Co-investment
Investment by a third party or by a fund investor outside of a fund structure into a portfolio company of a fund. A co-investment is typically made in parallel to the investment by the fund, at the same time and on substantially identical terms (pro rata purchase price) as the fund’s investment. In the compensation context, the term can also be used to describe the AIFM’s own investment in a private equity fund. This investment by the team is intended to ensure Alignment of Interest.
Commitment period
Also called the Investment Phase and the Investment Period. The period of time during which the fund makes new investments and draws down capital from investors for investment purposes.
Committed capital
Also commitment. The amount an investor obligates itself to pay to the fund in its subscription agreement. The aggregate amount of the commitments of all investors (plus any commitments of fund management) is equal to the total fund volume.
Continuation fund
A continuation fund is a private equity vehicle designed to extend the holding period of one or more assets from an existing fund that has reached or is approaching the end of its lifecycle.
D
Debt fund
Funds that invest exclusively or predominantly in debt securities.
Distressed debt
Loans and borrowings relating to debtors experiencing financial or operational distress, default, or bankruptcy.
Distributed to paid-in capital (DPI)
Distributed to paid-in capital is also known as the realisation multiple. It is calculated by dividing the cumulative distributions by paid-in capital. The DPI multiple, in conjunction with the investment multiple, gives a potential private equity investor insight into how much of the fund's return has actually been "realised", or paid out, to investors.
Distribution
Payment to the partners of profits and other amounts returned from investments made by the fund.
Distribution waterfall
The provisions of a fund agreement governing the sequence of payments to investors and the fund manager. See also Hurdle, Catch-Up and Carried Interest.
Divestment period
The stage following the investment period during which a fund disposes of its investments. Fund agreements typically allow four to six years for the divestment period.
Dividend recapitalization
A dividend recapitalization, often referred to as a dividend recap, is a financial strategy where a company takes on new debt to pay a special dividend to its shareholders.
Dry powder
In a broad financial context, "dry powder" is a term that signifies readily available cash reserves set aside for future deployment.
Due diligence
Due diligence is vital for ensuring that investments align with the strategic objectives, financial goals and risk tolerance of the stakeholders involved. Learn about the fundamentals.
E
ELTIFs (European long-term investment funds)
A European Long-Term Investment Fund (ELTIF) is an investment vehicle that makes long-term investments into private (unlisted) assets. ELTIFs are regulated investment funds with low minimums, designed to be accessible to all investors.
Equalization payments
Payments to the Fund made by investors who are admitted to the Fund after the Fund has already admitted investors and called-down capital from those other investors. The equalization payments are used to “equalize” the percentage of called-down capital commitment of each investor. This is done by distributing amounts to the “old investors” so that “old investors” and “new investor” have paid into the fund the same percentage of their Capital Commitment. Equalization Payments often require the “new investor” to pay compensatory interest to the fund to compensate the “old investors” for pre-financing the fund’s activities.
F
Feeder fund
Pursuant to the KAGB, a feeder fund is a fund that invests at least 85% of its assets into a master fund. See also Master Fund.
Final closing
The end of the Fundraising and the last time at which new investors are accepted into closed-ended funds.
First closing
Fundraising stage at which the first investors are accepted into a fund.
Fund of funds (FoF)
A fund that does not invest directly in operating companies but instead into target funds. A fund-of-fund’s target funds (also called directly investing funds) invest into portfolio companies that are operating companies.
Fundraising
Refers to the stage during which funds are raised from investors for a newly established fund. It ends with the Final Closing.
G
General partner (GP)
The partner of a limited partnership having unlimited liability, usually itself structured as a limited company to minimize potential liability (for example, in the German context, using a GmbH as general partner of a GmbH & Co. KG). In the English-speaking world, the term is often used as synonymous with fund manager.
GP commitment
The management company’s contractual agreement obliging it to invest in the fund it manages.
H
Hard cap
A legally binding upper limit contained in a fund agreement beyond which no further capital commitments to the fund can be accepted from investors.
Hedging
Use of options and other offsetting positions to limit economic risks.
Hurdle rate (preferred return)
Also called Hurdle Rate and Preferred Return. Contractually fixed minimum return for investors that must be attained before the fund manager receives distributions of its carried interest. The traditional hurdle for private equity funds is 8%, although rates of 6-10% are possible depending on the investment strategy and the reputation of the manager. Many traditional US venture capital funds do not provide for a hurdle at all.
I
Internal rate of return (IRR)
Internal Rate of Return (IRR) represents the annualised implied discount rate calculated from a series of cash flows. The IRR-method is the typical performance method for private equity funds because portfolio investments are bought and sold over time with several capital contributions and distributions. The IRR-method cannot be compared to interest rates of typical bank account interest rate calculations. The IRR-method considers only the tied up cash and only over the period of time during which the cash is tied up. The IRR-method typically indicates therefore a higher return than the use of another calculation methodology. Investors should therefore not use IRR-numbers as a return measure in comparison to other investments. Furthermore, it is important to scrutinize the assumptions for the calculations when comparing returns of various investments.
Interval funds
An interval fund is a type of Securities and Exchange Commission-registered closed-end fund that offers investors access to illiquid assets including private equity, private credit and real estate, while providing limited opportunities to redeem shares at regular intervals.
Investment alpha
Investment alpha represents the degree to which an investment manager or fund can outperform a market benchmark or expected return.
Investment strategy
Every fund will set forth a strategy (e.g., buy-out or venture capital) in its fund documentation (fund agreement, prospectus) according to which the capital raised from investors will be invested in suitable investment assets in a manner consistent with the applicable investment objectives, risks and time period.
Investment vehicle
Term used both to describe the fund itself (or Investment Platforms) and companies or legal arrangements used by the fund for the purpose of investing into acquisition targets and situated in an acquisition structure between the fund and the acquisition target.
IPO
Abbreviation of initial public offering. A stock market launch of a company on a public market.
J
J-curve
Describes the development in stages of a private equity fund’s returns, generating negative results in the initial years due to acquisition costs and initial losses, followed by returns exceeding costs in later years through the disposition of individual investments.
L
Leverage
Increase in the level of investment by a fund through financial means, such as borrowing and derivatives. The impact on returns is termed a leverage effect.
Leveraged buy-out (LBO)
Leveraged buy-out is a technique used to acquire companies, for the most part established companies with stable revenue and cash flow that can be used to service borrowing incurred by the company for its own acquisition. See also Buy-Out Fund.
Limited partner (LP)
A partner having limited liability in a partnership. This is the position of an investor in funds structured as partnerships.
Liquidation stage
Refers to the stage in the life of a fund in which, after expiration of the term of the fund, the remaining assets are sold to wind up the fund and distribute disposition proceeds to investors. During the liquidation stage, the corporate purpose of the fund changes to be focused solely on final termination of the fund.
Liquidity of funds
Each liquidity structure, spanning closed-end, semi-liquid and evergreen, strikes a different balance between accessibility, return potential and fund manager discretion. While closed-end funds maximise long-term value creation by locking in capital, semi-liquid and evergreen funds offer varying degrees of redemption flexibility, often at the cost of reduced return potential or higher liquidity management risk.
Liquidity premium
A liquidity premium is an incremental return that compensates an investor for owning an asset that is not highly liquid.
LPA
Abbreviation of Limited Partnership Agreement. Refers to the agreement governing the operation of a fund, which is typically organized as a limited partnership. The LPA is the central legal document of a private equity fund.
M
Management buy-in (MBI)
Management Buy-In (MBI) is the acquisition of a company by external company management with support from investors providing additional capital.
Management buy-out (MBO)
Management Buy-Out (MBO) is the acquisition of a company by its own company management with support from investors providing additional capital.
Management fee
Contractually determined amount paid for the AIFM’s performance of its management activity.
Management fee offset
An offset against the management fee of certain kinds of third-party compensation received by the fund manager.
Master fund
The master fund in a Master-Feeder Structure, assuming the role of main fund and serving as the target fund of one or more Feeder Funds.
Master-feeder structure
Describes a fund structure comprised of a master fund and one or more feeder funds. Each feeder fund invests its assets as an investor in the master fund. Structures of this kind are widespread to accommodate regulatory and/or tax or other requirements of certain categories of investors.
Mezzanine debt (mezzanine financing)
Mezzanine debt, also known as mezzanine financing, is a form of hybrid capital that combines features of both debt and equity financing. It sits between senior debt and equity in a company's capital structure and, at a more granular level, below subordinated debt.
Modified internal rate of return (MIRR)
Modified Internal Rate of Return (MIRR) is a method of calculating the return on an investment with multiple, irregular cash flows.
Multiple on invested capital (MOIC)
Multiple on Invested Capital (MOIC) is a metric commonly used to describe the value or performance of a private equity investment relative to its initial cost. If you invest Euros 1,000,000 and return Euros 10,000,000 in 10 years your MOIC is 10x. The MOIC does not take into account time. If you invest Euros 1,000,000 and return Euros 10,000,000 in 3 years your MOIC is still 10x.
N
Net asset value (NAV)
Net Asset Value (NAV) is a term applied to companies, funds, partnerships, trusts or other investment entities that describes the current value of the entity, usually expressed on a per-share basis.
No fault dissolution
Some fund agreements grant a right to investors to terminate the term of the fund early with a supermajority consent (e.g. 75%) without the requirement of good cause or misconduct on the part of fund management. This is an important investor right in the Fund Governance context.
No fault termination
Also called No Fault Cancellation. Fund agreements often provide an investor right to end the investment period early with a supermajority consent (e.g. 75%) without the requirement of good cause or misconduct on the part of fund management. This is an important investor right in the Fund Governance context. If the fund agreement provides only for a suspension, not a termination, of the investment period, this is called a No Fault Suspension.
P
Paid-in capital
A paid-in capital, also known as contributed capital, is the actual amount of money transferred to a private equity fund by a limited partner (LP).
PIC multiple
The PIC multiple is calculated by dividing paid-in capital by committed capital. This ratio shows a potential investor the percentage of a fund’s committed capital that has actually been drawn down.
Private equity
This refers, in very general terms, to equity investments in companies that are not listed on public markets.
Private equity fund
A fund making equity investments in companies not listed on public markets.
Private markets
The term “Private Markets” refers to investments in debt or equity instruments that are not traded on public exchanges. The debt and equity components of private markets are individually referred to as Private Debt and Private Equity.
Private placement memorandum (PPM)
Private Placement Memorandum (PPM) is a written summary of key information on the category, objective and risks of a fund investment. This includes in particular a description of the investment strategy, the fund manager, the risk management and the legal and tax risks.
Public market equivalent (PME)
Public market equivalent (PME) is a methodology for assessing the performance of a private equity fund relative to a public equity benchmark.
R
Residual value to paid-in capital (RVPI)
Residual Value to Paid-In Capital (RVPI) is the current market value of unrealised investments as a percentage of called capital. The RVPI multiple is calculated by taking the net asset value, or residual value, of the fund's holdings and dividing it by the cash flows paid into the fund. Cash flows are representative of the capital invested, fees paid and other expenses incurred by the limited partners to the fund. It provides a measurement, in conjunction with the Investment Multiple, of how much of the fund's return is unrealised and dependent on the market value of its investments.
Risk diversification
Risk diversification is the process of investing in assets that have a low correlation with each other with respect to performance over time. In other words, diversifying risk is accomplished by building out the investment portfolio using securities and asset classes that should respond differently to circumstances in the market.
S
Senior debt
Senior debt obligations (in particular debt obligations issued by banks) that take precedence over the claims of other creditors in the event of insolvency (or liquidation). The opposing term is Junior Debt.
Skin in the game
Unwritten principle for ensuring alignment of interest according to which the management team should use its own funds to acquire a significant investment of its own in the fund. The typical investment amount for fund management is in the range of 1-3%.
Special purpose vehicle (SPV)
Special Purpose Vehicle (SPV) is a company established for a limited specified purpose. SPVs are used in the context of acquisition financing of private equity transactions.
Subordinated (junior) debt
Subordinated debt obligations (in particular debt instruments issued by mezzanine funds) that will be paid, in the event of insolvency (or liquidation), only after satisfaction of other creditors of an issuer. The opposing term is Senior Debt.
T
Take-private
Take-private transactions, also known as public-to-private deals or P2Ps, occur when a publicly traded company transitions to private ownership. In this process, the company's shares are delisted from a public stock exchange and ownership is consolidated, often among a small group of investors.
Target fund
A fund (making direct investments) into which a fund-of-funds wishes to invest.
Time horizon
An investment time horizon is the time period one expects to hold an investment. Time horizons can be specific if associated with a stated maturity, or generalised as either short-term, medium-term or long-term.
Total value to paid-in capital (TVPI)
The total value to paid-in (TVPI) is also known as the investment multiple. TVPI is calculated by dividing the fund's cumulative distributions and residual value by the paid-in capital. It gives a potential investor insight into the fund's performance by showing the fund's total value as a multiple of its cost basis. It does not take into account the time value of money.
V
Valuation multiples
Valuation multiples are ratios that compare a company’s value to a financial metric such as revenue, EBITDA or net income. In private equity (PE), they are used to evaluate potential investments, negotiate pricing and model expected returns at exit.
Venture capital fund
A venture capital fund pools money from investors to finance early-stage startup companies. Venture funds focus on companies that have high long-term growth potential and are in need of capital to fuel their growth and development.
Venture capital secondaries
Venture capital secondaries refer to the purchase and sale of existing ownership interests in venture capital funds or in the startups those funds back. Unlike primary investments, which involve investing new capital directly into early-stage companies, secondaries revolve around transferring pre-existing positions from one investor to another.
Vintage year
In private equity, vintage year refers to the year in which a fund makes its first capital call, starting the clock on its investment period. This concept is crucial because it anchors the fund in time, which serves as a critical reference point for performance benchmarking.
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This is a marketing communication. Moonfare does not make investment recommendations and no communication, through this website or in any other medium should be construed as a recommendation for any security offered on or off this investment platform. Alternative investments in private placements, and private equity investments via feeder funds in particular, are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Prospective investors should carefully consider the risk warnings and disclosures for the respective fund or investment vehicle set out therein. The value of an investment may go down as well as up and investors may not get back their money originally invested. Past performance is not necessarily a guide to future performance. An investment in a fund or investment vehicle is not the same as a deposit with a banking institution. Please refer to the respective fund documentation for details about potential risks, charges and expenses. Additionally, investors will typically receive illiquid and/or restricted membership interests that may be subject to holding period requirements and/or liquidity concerns. In the most sensible investment strategy for private equity investing, private equity should only be part of your overall investment portfolio. Further, the private equity portion of your portfolio may include a balanced portfolio of different private equity funds. Investments in private equity are highly illiquid and those investors who cannot hold an investment for the long term (at least 10 years) should not invest.
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- 1 Minimum investment may vary by country and local regulation.
- 2 Source: McKinsey "Private Markets Annual Review 2022"
- 3 Past performance is no guarantee of future returns.