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Glossary
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Advisory board
Group of external
advisors to a private equity group or portfolio company. Advice
provided varies from overall strategy to portfolio valuation. Less
formal than a Board of Directors.
Asset Deal
Take-over transaction whereby a large part of the purchase price is covered by spinning off (non-core) assets.
Benchmark
A previously agreed upon point of reference or measure used to evaluate performance.
Bridge Financing
Temporary funding
that will eventually be replaced by permanent capital from equity
investors or debt lenders. In venture capital, a bridge is usually a
short term note (6 to 12 months).
Burn Rate
The rate at which a
start-up with little or no revenue uses cash savings to cover expenses.
Usually expressed on a monthly or weekly basis.
Business Angel
A wealthy individual
who invests in entrepreneurial firms. Although angels perform many of
the same functions as venture capitalists, they invest their own
capital rather than that of institutional and other individual
investors.
Business plan
A document that
describes a new concept for a business opportunity. A business plan
typically includes the following sections: executive summary, market
need, solution, technology, competition, marketing, management,
operations and financials.
Buy and Build
An investment made in
a business with the intention of acquiring further businesses in order
to build the value of the original investment.
Buy Back
The buying back of shares by a corporation in order to reduce the number of shares on the market.
Buy-Out (Financing)
A sector of the
private equity industry. Also, the purchase of a controlling interest
of a company by an outside investor (in a leveraged buyout) or a
management team (in a management buyout).
Capital Gain
A tax classification
of investment earnings resulting from the purchase and sale of assets.
Typically, an investor prefers that investment earnings be classified
as long term capital gains (held for a year or longer), which are taxed
at a lower rate than ordinary income.
Capital under Management
The amount of capital available to a management team for private equity investments.
 Captive Fund
Terms a fund, that is part of a larger finance organisation or is owned by it. Opposite of an Independent Fund.
Carried Interest
A share in the profits of a private equity fund for the management.
Cash Flow Deal
Management Buy-Out
financed largely by drawing on a company's cash flow to repay borrowed
capital and service debt incurred during the Buy-Out.
Closing
The conclusion of a financing round whereby all necessary legal documents are signed and capital has been transferred.
Co-Investment
The syndication of a
private equity financing round or an investment by an individual
(usually general partners) alongside a private equity fund in a
financing round.
Corporate Venturing
Venture capital provided by [in-house investment funds of] large corporations to further their own strategic interests.
Dealflow
A measure of the number of potential investments that a fund reviews in any given period.
Drag-Along
The contractual right of
an investor in a company to force all other investors to agree to a
specific action, such as the sale of the company.
Due Diligence
The investigatory
process performed by investors to assess the viability of a potential
investment and the accuracy of the information provided by the target
company.
Early Stage Financing
The state of
a company after the seed (formation) stage but before middle stage
(generating revenues). Typically, a company in early stage will have a
core management team and a proven concept or product, but no positive
cash flow.
Earn-Out
An arrangement in which
the sellers of a business may receive additional future payments for
the business based on the economic performance of the sold business (or
the buyer, including the sold business) after the sale.
EBIT - Earnings Before Interest and Tax
A
measure of the operating profit of a company. One possible valuation
methodology is based on a comparison of private and public companies'
value as a multiple of EBIT.
EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization
A
measure of the cash flow of a company. One possible valuation
methodology is based on a comparison of private and public companies'
value as a multiple of EBITDA.
EV - Enterprise Value
Used to
value a company who may be a takeover target. Most people use the
calculation of market capitalization plus debt & preferred shares
minus cash and its equivalents.
Equity investment
Transactions whereby an investment company or fund purchases equity in a company.
Equity Kicker
Option for private
equity investors to purchase shares at a discount. Typically associated
with mezzanine financings where a small number of shares or warrants
are added to what is primarily a debt financing.
EVCA-Guidelines
Guidelines of the
European Equity & Venture Capital Association for valuation,
performance measuring and reporting of venture capital / private equity
companies or funds.
Evergreen Fund
A fund that reinvests its profits in order to ensure the availability of capital for future investments.
Exit
The means by which a private
equity firm realizes a return on its investment. For venture
capitalists, this typically comes when a portfolio company goes public,
or when it merges with, or is acquired by, another company. More often
an exit is performed by a Trade Sale, secondary purchase or Buy-Back.
Expansion Financing
Provided for
the growth and expansion of an operating company, which may or may not
be breaking even or trading profitably. Capital may be used to finance
increased production capacity, market or product development, and/or to
provide additional working capital.
Financial investor
Typically a private equity company or private equity fund
Fund-of-Funds
A fund created to
invest in private equity funds. Typically, individual investors and
relatively small institutional investors participate in a fund-of-funds
to minimize their portfolio management efforts.
Hands-on / Hands-off
Adjective
applied to investors to indicate their investment approach. A
pro-active, hands-on investor might typically put a director on the
board and seek to influence the timing of an exit. A hands-off investor
leaves the management to get on with running their business.
Hurdle Rate
A minimum rate of
return required before an investor will make an investment and before
the management takes part by the carried interest.
Independent Fund
Independent fund or VC company which is not controlled by a certain finance group. Opposite: Captive Fund.
IRR Internal Rate of Return
The
IRR states the average (usually annual) return on the investor’s
invested capital. The calculation is based on both cash received (IN)
and cash paid (OUT) and on the NAV (Net Asset Value) of the investor.
Later Stage Financing
The state of
a company that has proven its concept, achieved significant revenues
compared to its competition, and is approaching cash flow break even or
positive net income. Typically, a later stage company is about 6 to 12
months away from a liquidity event such as an IPO or buyout. The rate
of return for venture capitalists that invest in later stage, less
risky ventures is lower than in earlier stage ventures.
Lead Investor
The venture capital
investor that makes the largest investment in a financing round and
manages the documentation and closing of that round. The lead investor
sets the price per share of the financing round, thereby determining
the valuation of the company.
Leveraged Buy-Out
The purchase of a company or a business unit of a company by an outside investor using mostly borrowed funds.
LoI (Letter of intent)
A document
confirming the intent of an investor to participate in a round of
financing for a company. By signing this document, the subject company
agrees to begin the legal and due diligence process prior to the
closing of the transaction. Also known as a "Term Sheet".
Liquidation Preference
The
contractual right of an investor to priority in receiving the proceeds
from the liquidation of a company. For example, a venture capital
investor with a "2x liquidation preference" has the right to receive
two times its original investment upon liquidation.
MBI
Following the success of the
MBO movement in the 1980s, MBIs developed as another means of changing
the ownership of a business whose owners wish to sell. The incoming
management team acquires the business with backing from institutional
investors (as opposed to incumbent managers who acquire it in the case
of an MBO).
MBO
A leveraged buyout controlled by the members of the management team of a company or a division.
Mezzanine
A layer of financing that
has intermediate priority (seniority) in the capital structure of a
company. For example, mezzanine debt has lower priority than senior
debt but usually has a higher interest rate and often includes
warrants. In venture capital, a mezzanine round is generally the round
of financing that is designed to help a company have enough resources
to reach an IPO.
Milestones / Milestone deal
Deal in
which investors would only release funds in increments, based on the
venture reaching mutually agreed-upon milestones. Also called Benchmark
Deal.
Multiples
A valuation methodology
that compares public and private companies in terms of a ratio of value
to an operations figure such as revenue or net income.
NewCo
The typical label for any newly organized company, particularly in the context of a leveraged Buy-Out.
Payback-Period
A specified time period divided by the cost of the investment
Private Equity
Equity investments in non-public companies.
Replacement Capital
Purchase of
existing shares in an company from another private equity investment
organisation or from another shareholder or shareholders.
Round of Financing
A portfolio
company may receive one round, or in many cases, several rounds of
financing in its life as needed. E.g. the investment company may not
invest all of its committed capital, but will reserve some capital for
later investment or an other company will invest.
Seed / Seed Capital
Investment provided by angels, friends and family to the founders of a Start-Up in seed stage.
Secondary Purchase
Selling of shares from one private equity company to an other
Seller’s Notes / Earn-Out
Time of
payment extension of selling price. "Left out" selling price claim on
the seller's side, i.e. a seller loan (possible dependent on the rate
of achievement).
Senior Debt
A loan that has a higher priority in case of a liquidation of the asset or company.
Share Deal
In a share deal the acquisition company or NewCo acquires the equity of one of more target enterprises.
Silent Partnership
Special form of mezzanine financing in Germany. Similar to a subordinated loan.
Spin-Off
A division of an established company that becomes an independent entity.
Start-Up
A new business. It can be
on any scale, but in fact most start-ups are small. Their critical
phase often comes later when they may need significant amounts of
capital to enter their chosen market.
SWOT-Analyse
Strength, weaknesses, opportunities and threats analysis
Tag-Along rights
The right of an
investor to receive the same rights as owners of a majority of the
shares of a company. For example, if a majority shareholder wants to
sell his or her interest in a company, an investor with minority
ownership and tag-along rights would be able to sell his or her
interest as well.
Target firm
Any firm that is an object of a takeover by another firm.
Track Record
Investors like to
invest in management and companies with a track record of producing
profits. This presents problems in the case of a new venture, but the
same principle applies because the individuals running the new venture
each have their own track record.
Trade Sale
The sale of the equity share of a portfolio company to another company or strategic investor.
Turnaround Financing
A process
resulting in a substantial increase in a company's revenues, profits
and reputation with the financial support of an investment company
after a company crisis.
Value of Debt
Value of Debt is the
value of the net indebtedness. This is the sum total of all interest
bearing liabilities (in particular bank debt) less freely disposable
cash-like items (in particular cash and cash at bank).
Value of Equity
The total value of
the ownership interest of the shareholders (common and preferred) in a
company. For this reason, shares are often known as equities i.e. part
ownership of company. The value of equity equals the enterprise value
minus the value of debt.
Venture Capital
A segment of the private equity industry which focuses on investing in new companies with high growth rates.
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