PRIVATE EQUITY GLOSSARY

PRIVATE EQUITY GLOSSARY

TERM DEFINITION
Accredited Investor In the U.S., this term is used by the Securities and Exchange Commission (SEC) under Regulation D to refer to
investors who are financially sophisticated. This can include high net worth individuals (HNWI), banks, insurance
companies, brokers and trusts.

To be an accredited investor, an individual must have an annual income exceeding $200,000, or $300,000 for
joint income, for the last two years with expectation of earning the same or higher income in the current year. An
individual is also considered an accredited investor if they have a net worth exceeding $1 million, either individually
or jointly with their spouse. Also, if a person can demonstrate sufficient education or job experience showing their
professional knowledge of unregistered securities, they too can qualify to be an accredited investor. In order to
invest in most PE offerings a client needs to be an Accredited Investors and Qualified Purchaser (defined below).
Alternative Investments An alternative investment is an asset that is not one of the conventional investment types, such as stocks, bonds and
cash. Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals
because of the complex nature and limited regulation of the investments.

The most common alternative investments are in private equity, real estate, hedge funds and commodities.
Alternatives tend to have different attributes to typical stock and bond investments from a risk return and time
horizon perspective, so adding them to a portfolio may provide broader diversification, reduce risk, and enhance
returns. Historically, alternative investments have played a major role in institutional investors’ portfolios, such as
endowments.
Benchmark A benchmark is a standard against which the performance of a fund or portfolio can be measured. Generally, broad
market and market-segment stock and bond indexes are used for this purpose.

Benchmarks are used to see how a fund has performed compared to peers. For example, when investing in a 2007
buyout fund, one would want to see how it performed compared to other 2007 buyout funds. Returns are divided
into four quartiles: the top quartile (the 25% of funds who performed best), the second quartile, the third quartile and
lastly the fourth quartile (the 25% of funds who had the worst performance). Performance can also be benchmarked
against a public index (e.g. S&P 500) to show relative performance against the public markets over a given period of
time. Typically at the portfolio level, public markets are used to benchmark for private markets funds. This is helpful
in order to determine the illiquidity premium (see glossary term) associated with a private markets investment.

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Buyout Investment A buyout is generally the acquisition of an established & mature company with positive cashflows. Buyouts of such
Strategy companies normally include change of control & ownership to the new owner. Buyouts can span investments in
small, mid-sized or large companies.

A buyout is typically when a private equity firm comes in and take ownership of a public or private company by
buying part or all of its equity. The PE firm’s aim is to improve how a company is managed during their ownership
and provide resources & guidance for long-term strategic planning and execution.
Capital Call A notification by the fund manager to the investors for cash required to fund investments or fees & expenses. Unlike
(also known as a Drawdown) mutual funds, whereby an investor puts their money into the fund upfront, private equity fund managers ask investors
for the money when needed.

For example, let’s say you commit $100MM to a private equity fund. You aren’t required to provide that money all
upfront. Each payment is only due once a fund identifies/makes an investment, or when a fund needs to pay down
its credit facility, in order to pay for an investor’s portion of that particular deal / set of deals / fees.
Capital Call Facility Capital call facilities are a short-term funding by banks on a revolving basis to private equity funds to bridge the
(a/k/a Credit Facility, Subscription time between when an investment is made by the fund and when capital contributions are received from investors
Line) to finance that investment. These loans are collateralized by underlying investor commitments and are repaid with
capital contributions once they are received from investors or by a fund’s investment realizations.

Following on from the capital call explanation above, let’s say a PE fund identifies an attractive investment. Instead
of requesting cash (“calling capital”) from investors, they pay for the investment using borrowed money (from a
capital call facility). One of the reasons for doing so includes the fact that it’s a quick way to pay for deals and doesn’t
burden investors with a short notice period to provide funds on time. This practice has gained popularity in the last
few years.

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TERM DEFINITION
Capital Commitment The amount of money that an investor commits to investing into a fund. The commitment will be confirmed to the
or Total Commitment investor at the fund’s closing, although capital will only be called as needed during the fund’s life.

This is the overall cash amount than an investor commits upfront to a fund. A fund’s total commitment is the
aggregate of all its underlying investors’ commitments. As discussed earlier, unlike mutual funds, private equity
managers do not call capital upfront. Instead investors are bound to a commitment agreement, which PE managers
then rely on to make investments.
Capital Contributions A contribution to a fund. Investors make capital contributions over time out of their capital commitment to a fund.

Contributions occur when a fund manager calls capital from investors in order to fund a deal, fees and expenses
and/or to pay down the fund’s credit line, and an investor contributes their pro rata share of the necessary amount
of capital.
Capital Distributions A distribution from a fund. Distributions occur primarily after investment realizations but can also occur after other
income events such as interest or dividend payments. Distributions are primarily made in cash.

These are cash returns that investors receive back from their alternative fund investments once those funds make
a profit. They can be driven by several occurrences: for example, a company has been sold, a recapitalization has
occurred, a dividend has been paid, or in the case of credit investments, from interest payments.
Carried Interest Carried interest, or carry, is a share of any profits that the general partners of private equity and hedge funds receive
as compensation. This method of compensation seeks to motivate the general partner (fund manager) to work
toward improving the fund's performance.

Carried interest serves as one of the sources of income for a fund manager, traditionally amounting to 20% of the
fund's overall profit. This normally kicks in above a certain rate of return, typically an 8% annualized return. For
example (for a fund with 20% carry above an 8% hurdle), first a fund must generate an 8% annual return on capital
called. Second, the fund manager will receive 100% of all additional distributions until they “catch up” to an overall
20% of all distributions. Thereafter, any distributions in excess of the first two steps are split 80% to the investors/LPs
and 20% to the fund manager.

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Catch Up The carried interest catch up refers to the situation in which a fund manager is fully compensated at the agreed-upon rate, once
investors have received their preferred return as disclosed in the Partnership Agreement. Under such a fee arrangement,
the investor typically still receive profit in addition to their expected return, but only once the manager has received their
pre-agreed share.

If a fund has a 100% catch up provision, then once a fund generates returns above the pre-determined hurdle
(typically 8%), a fund manager will typically receive 100% of all distributions until they “catch up” to a pre-determined
percentage (typically 20% of all distributions made). Thereafter, returns are split between the fund manager and
investors (typically split 80% to investors and 20% to the fund manager).
Clawback or In private equity, this refers to investors' rights to recover any excess carried interest that has been paid to the
Clawback Provision General Partner, in cases where subsequent losses mean that the general partners received excess compensation.

In other words, this refers to investors’ rights (towards or at the end of a fund’s life) to reclaim part of the fund
manager’s carried interest (see carry explanation above). This typically happens when a fund manager takes their
carried interest share early on in a fund’s life due to early strong performance, but then performance falls below
a hurdle rate (or other agreed upon measure). The clawback provision is built in to protect investors from such
scenarios.
Close A stage when a certain amount of money is raised by a private equity fund. The close is accompanied by a group of
(1st, 2nd, 3rd, etc., Final) the fund's limited partners completing their partnership agreement documents. Depending on the fund and its target
size, there can be one or several closings before fundraising is completed. The last close is referred to as the final
close, at which time the final fund size is set.

Each closing represents a stage in the fundraise. For example, a fund could raise $100MM from investors in their
first close, $300MM in their second close, and another $100MM in their final close, bringing the overall fund size to
$500MM. Sometimes, there will be incentives for investors to commit into a first close (e.g. lower fees). Investors who
come into later closes typically have to pay subsequent closing interest.

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TERM DEFINITION
Closed-End Fund Closed-end funds have a specific term (typically 10 years with extensions) and are only open to new investors during
their initial fundraising period (typically a period of between 6-18 months).

A private equity fund is typically a closed-end fund, meaning it is only open to new investors while it is fundraising,
Once a private equity fund has its final close, it is closed to new investors. PE funds also have a finite life as they
have a certain timeframe within which they have to dispose of their holdings – typically ten years plus a two-year
term extension.
Debt Financing At its most basic meaning, debt is an amount of money borrowed by one party from another. Debt financing occurs
(also known as Leverage) when a company raises money (e.g. for working capital or capital expenditures) by selling debt instruments to
investors. In return for lending the money, investors become creditors and receive a pledge that the principal and
interest on the debt will be repaid.

In a scenario where a PE fund is using leverage to help finance the acquisition of a company (also known as a
Leveraged Buyout), the use of debt, which has a lower cost of capital than equity, serves to reduce the overall cost
of financing the acquisition and potentially to increase the return on equity. Within private credit, a fund’s legal
documentation typically stipulates the maximum amount of leverage that can be used (e.g. 3x).
Distressed Debt Distressed debt refers to debt bought from companies that are either in bankruptcy or on the verge of it.

Some investors specialize in buying distressed debt, typically as a way to gain control of a company once it does
enter bankruptcy, with the intention of turning around its operations.
Direct Lending When lenders other than banks make loans to companies without intermediaries such as an investment bank or
a broker.

Historically, banks would make loans to companies. However, after the financial crisis, banks are more capital
constrained and are unable to lend as swiftly – but companies are still in need of funding. Private credit firms have
therefore stepped in to fill the gap and ‘directly lend’ to companies.

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TERM DEFINITION
Distribution Waterfall (typically The distribution waterfall is a pre-agreed formula for a private equity fund to make distributions of income / capital
European or American) gains to investors and the fund manager.

In a European-style distribution waterfall schedule, the hurdle threshold is calculated at the fund level. All distributions
will go to investors and the manager will not participate in any profits until the investor’s capital and preferred return
have been fully satisfied.

In an American-style distribution waterfall schedule, the hurdle threshold is calculated on each individual investment.
This structure allows for managers to take a profit prior to investors receiving their fund-level preferred return and
100% of invested capital.
Dividend Recapitalization A dividend recapitalization (also known as a dividend recap) happens when a company incurs a new debt in order to
pay a special dividend to shareholders. This usually involves a company owned by a private investment firm, which
can authorize a dividend recapitalization as an alternative to the company declaring regular dividends, based on
earnings.

In other words, where a company purposefully takes on debt so that they can return cash to their existing investors
(or to repurchase shares). Oftentimes, this recap is only possible after an increase in earnings.
DPI A realization multiple is a private equity measurement that shows how much has been paid out to investors. The
(Distributions to Paid-In Multiple realization multiple is so called because it measures the return that is realized or paid back from the investment. The
or Realization Multiple) realization multiple is found by dividing the cumulative distributions from a fund or company by the paid-in capital.

The DPI is how you calculate the amount of cash you have received back from your investments, versus how much
cash you have paid in, and is represented by a percentage. A 50% DPI means that for every $1 you gave to a private
equity fund, you have received $0.50 back. A DPI of greater than 100% means that a fund has returned its initial cost.

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Dry Powder The amount of cash or other liquid assets available for a fund to deploy, based on capital committed to the fund
by investors. In other words, dry powder is the difference remaining between a fund’s total committed capital and
invested capital to date.

This is a fund’s total commitments less any dollars committed to investments. For example, if a fund raised $100
million and committed to 5 deals worth $60 million total (even if they didn’t call capital), the remaining dry powder is
$40 million – a/ka/a what the fund manager has left to spend.
Due Diligence The research performed by an investor on a potential investment, in order to determine its merits and uncover
potential risks.

The due diligence process is designed to uncover the strengths and weaknesses that could potentially affect
performance. The key areas that are typically analyzed are: a fund’s past performance, the team members and their
experience, the fund’s strategy, market opportunity, the attractiveness of the sector, how deals are sourced and how
value is created during the firm’s ownership period.
EBITDA EBITDA stands for earnings before interest, taxes, depreciation and amortization.

EBITDA is a measure of a company's performance. Essentially, it's a way to evaluate a company's performance
without having to factor in financing decisions, accounting decisions or tax environments, and gives a better
understanding of free cash flow generation.
Exit The sale of an asset or portfolio company.

Typical paths to exit include listing a private company in the public markets before selling it down in block trades
or selling the company to another private equity fund (strategic sale) or a corporate firm (trade sale). Once a deal
closes, then the fund will receive cash from that sale (this may happen several months after the sale is announced).
These cash proceeds are then given to investors in the form of a distribution.

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Financial Engineering A lever to generate returns on an investment by modifying a company’s capital structure and use of leverage.
Financial engineering differs from making operating improvements in a company.

The management of leverage and cash management is typically one of the components to value creation in a
private equity firm’s portfolio. Debt often has a lower cost of capital – thus, using leverage for an acquisition and
then paying it down using cashflows creates value for equity investors.
Follow-on Investment A follow-on is a subsequent investment made into a portfolio company which has already received funding. In the
case of a venture capital fund, there may be several rounds of follow-on investing.

For example, four years into a PE fund owning a company, the company might need additional cash in order to
acquire a competitor and merge the two together. In order to finance this, the PE fund can provide a follow-on
investment. Follow-on investments can be called for after the investment period ends.
Fund An investment fund is the pooled capital of investors that enables the fund manager make investment decisions on
(or Investment Fund) their behalf.

The commingled fund is managed by a General Partner, and investors are known as Limited Partners.
Fund Term The number of years that a fund expects to be in operation. Typically, a private equity fund will operate for 10 years,
with the option to extend for a few more years if the need arises.

The fund term is simply another way of saying how long the fund life lasts.
Fund-of-Funds A fund that takes equity positions in other funds. Fund-of-Funds can invest in private equity funds or secondary funds.

In other words, an alternative investment fund that aggregates investors commitments in order to invest in underlying
fund managers. The basic idea is that a fund of funds can offer greater diversification and access to high-minimum
funds, albeit with an additional layer of fees.

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Fundraising Period The period from when a fund’s formation is announced to the time when the final closing occurs.

This period usually lasts 6-18 months. During this period, the fund’s investor relations team will typically meet with
prospective investors to market the fund.
General Partner (GP) The manager of a private equity fund. The GP is given unlimited liability for the debts and obligations of the fund as
well as the right to manage the fund.

In other words, the fund manager.

Growth Equity Growth equity investors pursue companies at a development stage between venture capital (early stage businesses
with limited historical financials) and leveraged buyouts (mature companies with a long track-record of cash
generation).

Growth equity investors seek to invest in well-run companies with proven business models (established products
and/or technology and existing customers) and a history of significant and rapid revenue growth, which minimize
the technology adoption risks often associated with venture capital investing. Growth equity investments can be
minority or majority in nature (historically these were minority positions but this has shifted in recent years), and
typically use little to no debt.
Hard Cap The stated maximum amount of capital that a fund manager wishes to raise before they stop fundraising.

For example, a PE fund might have a target $100MM fund size with a stated hard cap of $120MM. Once they reach
$120MM, they will stop accepting commitments from investors. Large investors often impose this cap in order to
ensure that there is no significant strategy shift into larger deals.
Hurdle Rate Represents the minimum rate of return that a fund must earn before it can begin to charge a performance fee.
(a/k/a Preferred Return)
A hurdle is typically 8%. This means that investors are entitled to a minimum 8% annual return before the fund
manager may begin receiving carried interest (see definition: carried interest).

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Illiquidity Premium A premium demanded by investors when any given security cannot be easily converted into cash for its fair market value.
(interchangeable with Liquidity
Premium) The illiquidity premium compensates an investor for tying up their capital in an illiquid security or fund. In return, they
are typically compensated by the expectation of greater potential returns.
Investment Period The initial period of a private equity fund’s life in which deals are sourced and new investments can be made.

The investment period is typically three to six years. After that period, management fees are typically lowered and
cash can only be called from investors to cover follow-ons or fees.
IRR The IRR is a performance metric which expresses the discount rate that sets a fund’s cash outflows equal to its inflows
(Internal Rate of Return) in present value terms. In other words, all of the fund’s contributions and distributions are listed, and the discount rate
that makes them add up to zero is solved for. The net IRR is a modified IRR value that has taken into consideration
management fees and any carried interest.

The net IRR is the net return earned by PE investors over a particular period, which is calculated on the basis of cash
flows to and from investors, after the deduction of all fees and expenses. IRR is a dollar-based concept which takes
into account the effect of time – as an investment is held for longer, IRR will lessen (in other words, doubling your
money in two years is much better than doubling your money in five years). Although IRR is a standard performance
metric within private equity, it does not reflect actual cash returned to investors, and so should be analyzed in
conjunction with the relevant MOIC metric (MOIC definition can be found below).
J-Curve A phenomenon where an where an initial loss is followed by a significant gain. Typically shown as a line graph which
illustrates how capital flows into a fund manager in the early years of a fund, in order to be used to make investments;
and how the capital then produces gains towards the latter years in the fund’s lifecycle. Plotted over time, the J-curve
shows the historical tendency of private equity funds to deliver negative returns in early years as money is invested,
and investment gains in the outlying years as the portfolios of companies mature.

This demonstrates how private equity funds typically have ‘negative’ returns in the first few years (as investors
have to pay management fees and initial investment costs from day 1) which then turn into positive returns as the
underlying investments mature and start to generate returns that significantly outweigh the fee and expenses. When
you chart these cashflows over a private equity fund’s life, they typically follow a “J” shaped curve.
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TERM DEFINITION
Key Person Provision A legal provision that takes into account the lead investment professionals in a fund and what action will be taken in
case one or all of those people are no longer able to manage the partnership/fund.

This provision ensures that the most important people involved in investing a fund (for example, the founders or
portfolio managers or the Managing Partners), who are expected to be key to the fund’s success, are unable to leave
before the fund has finished investing. If the provision is triggered, investors are typically given a range of options,
such as being able to stop the investment period or approve a new investment manager instead.
LBO A leveraged buyout is the acquisition of another company using borrowed money (bonds or loans) to meet the
(Leveraged Buyout) cost of acquisition. Often structured in such a way that the target's cash flows or assets are used as the collateral
(or ""leverage""). Leveraged buyouts allow companies to make large acquisitions without having to commit a lot of
capital upfront.

In other words, when a company is purchased using a combination of both equity and debt, often involving a change
of control.
Limited Partner “LP” An LP is an investor who makes a commitment to a private equity fund and provides capital as it is called.
(also Investor) The investor has no control over the management of the fund.

In other words, an investor in a private equity fund. This could be an individual, an institution, a family office, a trust etc.
Lock-up Agreement A lock-up agreement is a legally binding contract between the underwriters and insiders of a company prohibiting
(Post-IPO) these individuals from selling any shares of stock for a specified period of time. Lock-up periods typically last 180
days (six months) but can on occasion last for as little as 120 days or as long as 365 days (one year).

After an IPO, initial shareholders are typically subject to a period where they are unable to sell their shares.
This prevents these holders from putting too much of the stock on the market and thereby diluting the stock price.

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Loss Ratio This tracks the total amount of capital that is valued or realized below cost (below 1.0x) in a fund, over total
invested capital.

A loss ratio is one of the metrics that allows investors to analyze the quantum of losses in prior funds. In buyout funds,
a loss ratio of less than 15% (i.e. 15% of invested capital is realized or held below cost) is considered preferable. In
venture funds, a loss ratio of less than 30% is considered preferable; in distressed debt funds, a loss ratio of less
than 10% is considered preferable and in direct lending funds, a loss ratio of less than 5% is considered preferable.
Management Fee A management fee is a charge levied by an investment manager for managing an investment fund. The management
fee is intended to compensate the managers for their time and expertise for selecting investments and managing the
portfolio. It can also include other items such as investor relations expenses and the administration costs of the fund.

Investors (LPs) in a fund pay this fee to the fund manager in return for managing the fund. This fee is typically
paid quarterly and is in the range of 1.0-2.5% of committed or invested capital annually, which varies by
investment strategy.
Mezzanine Debt Mezzanine debt is unsecured debt which is junior to the senior debt. Mezzanine debt is frequently associated
with acquisitions and buyouts, for which it may be used to prioritize new owners ahead of existing owners in case
of bankruptcy.

Mezzanine is a middle layer of financing that is senior to equity but junior to the senior debt layer. Mezzanine
financing is typically used to achieve goals that require capital beyond what senior lenders will extend.
Minimum Capital Commitment The smallest amount of capital that the fund will allow to be invested by a single LP.

In other words, the minimum amount a potential fund investor has to invest in order to be able to participate directly
in a fund. On the private equity side, this typically ranges from $1MM-$10MM.

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MOIC This ratio is calculated by dividing the remaining net asset value of a fund plus the cumulative distributions returned,
(Multiple of Invested Capital) by the total amount of capital that was paid in for investments, fees and expenses. The resulting ratio is used as a
or TVPI performance metric alternative to IRR.

A net MOIC (also known as Total Value to Paid-in Capital “TVPI”) calculates the ratio of money generated to the
money invested. For example, if you invest $1MM, and the return generated in 10 years is $10MM – your MOIC is 10x
($10/$1). If you invest $1MM, and the return generated in 2 years is $10MM, your MOIC is still 10x ($10/$1). Essentially,
a MOIC does not take into account the time it takes for a return to be generated, and instead represents the actual
cash return in your pocket as a multiple of your initial investment.
Paid-In Capital The amount of money that has been called by the fund from investors.

Another way of saying drawn capital – the cash from investors that has actually been called from investors for
investments as well as fees and expenses.
Percent Called The amount of money that the fund has called from investors (less recallable distributions) divided by the total
amount of commitments to the fund.

In other words, if you committed $100MM to a fund and the fund has asked you to contribute $20MM thus far to pay
for deals, then you are 20% called. Any recallable distributions that take place are added back to the amount of
unfunded capital that has yet to be called.
PME A benchmarking calculation that compares the performance of a private equity fund to the performance of an
(Public Market Equivalent) equivalent public market index, such as the S&P 500 or the Dow Jones Industrial Average. There are different
versions of this calculation that have been developed, but the goal of each is to show how an investment in a PE fund
compares to a similar investment pattern in the public market index.

A PME calculates a fund’s outperformance (or underperformance) over a public market index, therefore helping
quantify the illiquidity premium that is achieved. For a U.S. buyout fund, we typically track outperformance versus
the S&P 500 or Russell 2000.

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Private Credit Private credit is credit that is extended to companies or projects on a bilaterally negotiated basis. It is not publicly
traded such as many corporate bonds and is originated or held by lenders other than banks. It takes various legal
forms including loans, bonds, notes or private securitization issues.

Private credit encompasses various strategies including real estate debt, distressed debt, direct lending,
mezzanine financing and structured financing.
Private Equity Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private
equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of
public companies, resulting in the delisting of public equity.

Generally speaking private buyout, growth and venture funds are all private equity investments. Institutional and
HNW investors provide the capital for private equity, and the capital can be utilized to fund new technology, make
acquisitions, expand working capital, and to bolster and solidify a balance sheet. In the U.S., due to regulations,
individuals need to fit the Accredited Investor and Qualified Purchaser status in order to invest in private
equity funds.
Private Markets Investments not traded on a public exchange or market. Includes equity or fixed income investments directly into
private companies or investments in partnerships investing in such private companies.

Private markets asset classes include private equity, hedge funds, private credit, venture capital, infrastructure and
real estate, amongst others.
Qualified Purchaser To be a Qualified Purchaser, an individual must own $5 million or more in investments, or invest at least $25 million,
either for their own accounts or on others' behalf (e.g. a professional investment manager).

The qualifications to be a Qualified Purchaser are significantly more stringent than that of an Accredited Investor.
Most private market funds (e.g. private equity funds) require their investors to be Qualified Purchasers.

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Subsequent Investors who do not participate in the first closing are usually required to pay their pro rata share of previously
Closing Interest funded capital for investments, fees & expenses, together with interest, which is typically distributed to the initial
investors.

Investors who do not participate in the first closing are essentially required to compensate the initial investors for
their fair pro rata share of already-paid organizational and other expenses as well as any investments that were
funded before they committed to the fund. This also incentivizes investors to participate in the first closing when
possible. Subsequent closing interest is typically 8% p.a. but varies from fund to fund.
Target Size The amount of capital that a fund manager wishes to raise to effectively deploy capital against their target market
opportunity. It is not uncommon for a fund manager to raise a smaller or larger amount than their target size.

In other words, this is how much overall cash a fund manager hopes to raise (and then invest) for a specific fund.
Topic 820 Topic 820 (formerly known as Financial Accounting Standard 157) is the Financial Accounting Standards Board
(Formerly FAS 157) (FASB)’s fair value accounting standard, which was initially introduced in 2006.

Topic 820 is the PE industry accounting standard that is used to determine the ‘fair value’ of private investments on
a quarterly basis, in accordance with U.S. GAAP. This valuation method has funds value their investments to reflect
what the fund would receive if they sold their position as of a quarter end – not what the fund manager expects they
will ultimately realize once the company is ready to be exited.
Unrealized Portfolio The value of the assets in a portfolio that have not yet been sold.

In other words, these are the underlying investments in a private equity fund that have not yet been sold for a gain
(or loss). They are typically valued on a quarterly basis, and their unrealized value reflects the potential profit (or
loss) that the fund expects they would receive if the asset was sold at that point in time, based on its current financial
performance – not what the fund manager expects they will ultimately realize once the company is ready to be
exited.

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Valuation Private equity funds value their investments on quarterly basis. U.S. GAAP – specifically, ASC 820, Fair Value
Measurements and Disclosures (formerly known as FAS 157) – provides a single framework for measuring fair value
and related disclosures.

Typically, a fund manager will work with their investment team (and sometimes a third party) to determine an
investment’s market value. This could include a discounted cash flow analysis (“DCF”), public comps etc. Fund
managers typically provide quarterly reports to their investors, which includes each portfolio company’s valuation,
including information on valuation methodology.
Value Creation Value creation is how fund managers generate returns in their portfolio companies for investors. There are three key
value creation levers: earnings growth, multiple expansion and debt paydown.

Analyzing value creation methods allows investors to see the key drivers of a fund’s returns. Fund managers who
create value primarily through earnings growth are typically favored as this reflects a manager’s skill in operationally
improving a company, rather than relying on financial engineering or buoyant exit markets.
Venture Capital Venture capital is financing that investors provide to startup companies and small businesses that are believed to
have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any
other financial institutions. However, it does not always take just a monetary form; it can be provided in the form of
technical or managerial expertise. Though it can be risky for the investors who put up the funds, the potential for
above-average returns is an attractive payoff.

In other words, venture capital typically involves investing money into early stage companies/start-ups in order to
help them grow and become profitable. At the time of investment, venture-backed companies often do not have
revenues and/or positive cash flow and may require more capital (/rounds of financing) prior to the company being
sold or taken public. These investments involve a substantial element of risk.

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 PRIVATE EQUITY GLOSSARY

PRIVATE EQUITY GLOSSARY

TERM DEFINITION
Vintage Year The vintage year is the year in which the first influx of investment capital is delivered to a project or company. This
marks when capital is contributed by venture capital, a private equity fund or a partnership drawing down from its
investors. Investors can use the vintage year of an investment to further explain its returns.

For example, if a private equity fund starts investing in 2016, it is typically considered a 2016 vintage fund. However
there are no official guidelines to determine a vintage year and some PE fund managers will instead use the
fundraising year as the vintage year. This metric is particularly useful when benchmarking a fund’s performance –
as funds of the same vintage are typically compared to each other.
Yield Yield is the income returned on an investment, such as the interest received from holding a security. The yield is
usually expressed as an annual percentage rate based on the investment's cost, current market value, or face value.
Yields may be considered known or anticipated depending on the security in question as certain securities may
experience fluctuations in value.

Yield measures the income, such as interest and dividends, that an investment earns and ignores capital gains.
This income is taken in the context of a specific time period and then annualized.

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