Are you interested in investing and looking for new opportunities? If yes, then you should consider investing in Private Markets.

Let’s see what Private Markets all is about and we will provide you with the Private Markets Glossary to better understand what this type of investment is all about.

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Private Markets Definition

This term is used when we are talking about investments in equity and debt of privately owned companies.

Private equity is equity capital invested in private companies. Investors hope that by investing in private companies they will manage to increase a company’s value. As a result, they will sell their stake at a later stage through a trade sale, buyout, a recapitalization or through listing the company on public markets through an initial public offering or what we call IPO.

Private equity investments tend to represent most investments in private markets

On the other hand, private debt funds typically refer to the ownership of credit issued by private companies that either seek more flexible financing terms or are neglected by banks due to the complexity of transactions.

So, now that we know what a Private Market is, it is time to present you with the Private Markets Glossary.

Private Markets Glossary

A

Accelerator

An organization that helps early-stage companies improve their product, growth, and investability via a fixed-term program that includes education and mentorship from industry experts.

Accredite Investor

Investor who is considered sophisticated by the regulator, are often measured by asset size and experience.

Active Investor

Investor who is active in the trading of a company’s securities, as opposed to passive. Historically the domain of listed companies and improved liquidity for private companies create new opportunities for active management.

Angel Investor

An individual who provides capital to start-ups. Angel investors are rarely involved in the daily management of the company but often add value through capital, network, and expertise.

Asset-Backed Lending

Any type of loan that is secured by an asset. If the debt is not repaid, the asset is repossessed by the loan provider. Common assets include accounts receivable, inventory, equipment, and real estate. 

Asset Classes

A group of financial instruments that have similar characteristics and/or marketplace behaviors. Examples include equity, fixed income, real estate, commodities, and cash.

Assets Under Management

The combined market value of the assets controlled by an asset manager (private equity firm, investment fund, depository institution, etc) on behalf of clients.

B

Balanced Fund

A venture capital fund that focuses on investments across a range of assets.

Benchmark

Standard performance metrics for measuring success versus an index or target. Investors use company benchmarks to help make investment decisions.

Blind Pool

A direct participation program or limited partnership without a specific, stated investment goal. These pools typically raise money through an individual’s name recognition or a firm’s past performance.

Bridge Loan

Short-term debt financing that aims to provide immediate liquidity to meet obligations or make acquisitions until a longer-term debt or equity investment can be secured.

Buyout

The purchase of a controlling share of a company’s equity.

Buyout Fund

A fund that uses money from wealthy investors to acquire the controlling interest in established companies.

C

Capital Call

When a fund manager in private equity calls or demands committed capital from limited partners. After the call, the capital contribution is typically due within 10 business days. 

Capital Gain

When a capital asset is sold at a higher price than its purchase price.

Carried Interest

The share of the profits paid to the general partner regardless of investment contributions. This fee encourages enhanced performance.

Cash Burn Rate

The rate at which a company expends capital to finance activities. This measure of negative cash flow is typically expressed in months and helps start-ups calculate their runway.

Claw-Back

A provision in which limited partners commit to paying back distributions to pay for any legal judgment imposed on the fund if the fund lacks the assets to make the payment.

Closed Fund

A fund that is no longer taking commitments from limited partners and is ready to start investing.

Closing

The final event that completes an investment. At this point documents are signed, funds are transferred, and ownership is legalized.

Co-Investment

When one or limited partners make a direct investment into a company alongside a VC/PE fund.

Co-Sale Rights

A contractual obligation that grants minority shareholders the right to join a sale if a major shareholder sells their stake.

Commitments

A limited partner’s obligation to provide a fund with the amount of capital subscribed.

Convertible Debt

Debt that automatically converts into equity at a specific date or valuation.

Corporate Venturing

When a large company takes a minority position in a small but promising company in a related field. The goal is to benefit from the smaller company’s growth and innovation.

Covenant

A condition in debt finance that requires the borrower to fulfill certain requirements, such as performance targets and monthly reporting, or to refrain from certain activities such as the wholesale change that might disadvantage investors.

Credit Rating Agency

A professional service provider specialized in the analysis of risks, such as the creditworthiness of a company or bond issue.

Creditworthiness

An assessment of the ability and willingness of a borrower to repay their debt obligations. This Assessment is based on qualitative factors such as leverage, interest cover, cash flow, etc plus qualitative factors such as credit history.

Crowdfunding

The practice of funding ventures by raising small amounts of equity or debt from a large number of investors, often through a digital platform.

Custodian

A bank or professional service provider that safeguards financial assets for companies and their investors to minimize the risk of theft or loss.

D

Data Room

A virtual space used to store and secure digital information.

Debt Finance

Capital for expansion, acquisition, or working capital in the form of instruments such as loans, bonds, bills, notes and securitization. Debt can be listed or private placement, secured or unsecured, subordinated or unsubordinated.

Dilution

When a new financing round occurs and new shares are issued, existing investors will experience a reduction in their ownership percentage if they are excluded from the new round.

Distribution

All cash, shares, or securities are returned to limited partners by the fund.

Distribution Waterfall

The order in which payments are allocated to limited partners and general partners during cash distributions.

Dividends

Distributions made by a company to its shareholders. Dividends are typically cash payments but can also be paid in additional company stock.

Drag-Along Rights

Rights that enable a shareholder to force other shareholders to participate in the sale of the company.

Dry-Closing

When a VC/PE firm raises money for a fund at an early stage but agrees to refrain from making any capital calls to limited partners until it actually starts investing in the fund.

Dry Powder

This term refers to the cash reserves on hand for future investments or to cover obligations. Assets that can be liquidated quickly can also be considered dry powder.

Due Diligence

The process used by investors to investigate the risk and potential of an investment. This includes evaluating a company’s operations, management, performance benchmarks, and material facts of the company and investment terms.

E

Early-Stage Company

A recently founded company that is still developing its initial products/services.

Early-Stage Fund

A VC fund that focuses on investing in early-stage companies.

Enterprise Value

The total value of a company, including the fully-diluted market capitalization and net debt. The sum of all claims by all claimants. 

Equity Finance

Capital raised by issuing common or preferred shares/stock. Investors become shareholders and may receive dividends. Shareholder rights are protected by corporate governance.

Evergreen Fund

A fund that never closes to ensure consistent cash flows. These open-ended funds can recycle realized returns.

Exit

When an investor decides to sell all or a big portion of their stake in a company for cash, debt, or shares of a different company. At this point, the investor will realize a profit or a loss.

Exit Strategy

The way in which a VC/PE fund or business owner plans to sell their share in an investment. Exit strategies typically lead to a liquidity event in which the shareholder can make a substantial profit if the investment is successful.

F

Family Office

A private entity established to manage the assets and investments of a wealthy family or individual.

FFF Round

FFF refers to Friends, Family, and Fools. This is a source of funding for start-ups when the founder needs to lean on personal relationships for initial funds.

Final Close

A threshold has been reached and the general partner stops fundraising. New LPs can no longer join the specific fund.

Final Return

The return owed to limited partners when the fund is liquidated, after all capital has been returned to LPs.

Financing Round

This is the round where a company raises money in a structured manner, usually with a target number of shares at the desired price per share. Companies will go through multiple rounds from Seed and Series A to Exit. The round is closed when the money is raised.

First-Round financing

The first investment made in a company by outside investors.

Follow-On Investment

When a VC joins a subsequent round of financing after making an initial investment in the company.

Follow-on Offering

An issuance of stock shares that follows an initial public offering (IPO). An FPO is either diluted or non-diluted. A diluted FPO lowers a company’s earnings per share (EPS) as it issues new shares. A non-diluted FPO uses existing shares and does not affect the EPS.

Fund of Funds

A mutual fund that invests in other funds rather than making direct investments in companies, bonds, or other securities.

G

General Partner

The entity that manages a private equity firm. Unlike limited partners, general partners execute and operate investments and have full liability.

General Partner Commitment

The amount of invested capital expected from the general partner. This aligns interests and builds confidence as the limited partners know that the general partner has a vested interest in the performance of the fund.

Generalist Fund

A fund with wide-ranging investment activity across sectors and development stages. Experienced generalists can move in and out of different types of investments, which is often not possible for a specialist.

GP Catch Up

A provision in a partnership that allows the general partner to receive all, or most, of the remaining profits until the GP receives the full carry amount. This occurs after the LPs have received their preferred return and allows the GP to “catch up.”

GP Claw-back

A provision that allows the funds to take back excess funds from the general partner if the GP has received too much carry over the fund’s lifecycle.

Ground Floor

The beginning or first stage of a new venture or potential investment.

Gross Return

Returns from investments before deducting expenses, carried interest, and management fees. Gross returns contrast with net returns, which are the returns that LPs receive from the fund after deductions.

Growth Equity

Growth equity is an investment in relatively mature companies that are going through some transformational event in their lifecycle with the potential for some dramatic growth.

Growth Fund

PE funds invest in relatively mature companies that need funds to expand or restructure.

I

Incubator

An organization that fosters early-stage companies through the use of resources, expertise, mentorship, and access to capital. Incubators help growing companies until they are capable of succeeding on their own. Incubators may take a fee or equity option in their portfolio.

Initial Public Offering (IPO)

The process by which a private company offers shares for sale to the public for the first time on a stock exchange. The shares will vary in price and be traded if liquid.

Institutional Investor

A financial organization that invests in others. Institutional investors such as insurance companies, pension funds, and mutual funds make up a large portion of private equity limited partners.

Internal Rate of Return

The interest rate that makes all present cash flows equal to zero.

Investability

How attractive an investment is to investors based on qualities that are likely to reduce risk and maximize value.

Investment Banks

An intermediary between an issuer of debt or equity and the investors.

Investor Relations

The process of keeping debt and equity investors informed about company performance and key events. Helps investors make informed decisions about providing further support or compliance with deal terms.

J

J-Curve

The tendency for a private equity fund to experience negative returns in its initial years and then post increasingly positive returns as the fund matures.

L

Later-Stage fund

A venture capital fund that primarily invests in companies that have grown beyond the start-up phase and have proven sales or significant growth potential.

Lead Investor

The investor who provides initial venture capital and anchors early financing rounds. The lead investor typically invests at least 10-15% of the round and often has the highest share of equity.

Leverage

Investing borrowed capital to expand assets and amplify returns.

Leveraged Buy-Out

The use of borrowed capital to buy a company. In private equity, firms typically use their own assets as collateral to pay for a large portion (70-80%) of the purchase price.

Limited Partner

An investor in a VC/PE fund who is not typically engaged in the day-to-day management of the investment, which is the role of the General Partner.

Limited Partnership

The legal structure used to form a VC/PE fund. Limited Partnerships have at least two partners, the general partner and, on the other hand, the limited partner.

Limited Partnership Agreement

The written, founding document of a limited partnership. It is used to define the authority of the general partner, the rights of limited partners, and the key terms of the agreement.

Liquidation

The process in which a company’s operations and business activity are brought to an end.

Liquidation Preference

A clause that is common in venture capital contracts that directs the payout order during a corporate liquidation event.

Liquidation Waterfall

The allocation of payments made to stockholders after a company sale or other liquidation events, based on liquidation preference.

Liquidity Event

A merger, acquisition, IPO, exit or other event where a shareholder realizes (liquidates) its investment. Can also be applied to debt financing in relation to a repayment or refinancing.

Lock-up Period

The pre-determined period of time which company shareholders must wait before they can sell or redeem their shares after an initial public offering.

M

Management Buy-In

The purchase of a company by an outside team of managers with financial backing from PE funds and banks that will replace or succeed existing management.

Management Buy-Out

When the operating manager or management team purchases the business or assets that they currently manage.

Master Limited Partnership

A publicly traded limited partnership. These partnerships enjoy both the tax benefits of a private partnership and the liquidity of a publicly traded entity.

Mezzanine Fund

A fund that provides mezzanine investment, generally to facilitate the financing of buyouts.

Mezzanine Investment

A round of financing between senior and subordinated debt that commonly includes convertible equity instruments known as warrants.

Mezzanine Level

Describes a company at a stage between start-up and Initial Public Offering. Committed capital at this level is riskier and potentially more rewarding than investing in an IPO, but typically has less risk and potential reward than start-up investing.

N

Negative Pledge

An undertaking by a borrower not to create, pledge or subordinate certain of its assets without the prior consent of the lender.

Net Asset Value

The total value of a fund’s assets minus the total value of its liabilities.

Net Return

The returns a fund receives from its investments after deducting expenses, management fees, and the carried interest paid to the general partner. Net returns are the returns realized by limited partners.

P

Paid-in Capital

The full amount of cash or other assets that have been transferred from the limited partner to the general partner.

Pari Passu

It is used to describe situations where two or more assets, creditors, securities, or obligations are managed equally, without preference.

Passive Investors

Investors who attempt to generate returns that mirror the returns of a predetermined benchmark.

Payment-in-Kind

Payment made to investors with equity or securities instead of cash.

Pitch

A presentation with the intention of convincing an investor to invest in a company.

Portfolio Company

One entity that a VC/PE firm invests in. The portfolio is the entire range of companies that the firm invests in and each company is a portfolio company.

Post-money Valuation

The value of a company after a round of financing. This includes the pre-money valuation plus any new capital.

Pre-money Valuation

The value of a company prior to an investment.

Preferred Return

A minimum annual return that limited partners receive before the general partner receives any carried interest.

Preferred Stock

A type of equity that has a priority position over common stock for dividends or asset distribution. Preferred stockholders typically have no or limited voting rights in corporate governance.

Primary Offering

When a private company first issues its stock for public sale, typically to raise capital.

Private Debt

Debt investments in companies by banks and funds that are not publicly traded.

Private Equity

Equity investments in companies by business angels, family offices, CVC, VC and PE funds that are not publicly traded. Generally, these are illiquid and long-term investments.

Private Limited Partnership

A limited partnership with no more than 35 general and limited partners.

Private Placement

A funding round of debt or equity that is privately held instead of listed and traded on a public exchange.

Pro Rata

In VC/PE, the right, but not the obligation, of an investor to participate in future financing rounds so they can avoid dilution and keep their percentage ownership stake in the company.

Public Market Equivalent

The measures used to compare the performance of private equity to the public market by applying PE cash flows to hypothetical investments in the stock market index.

R

Raising capital

Obtaining money from investors via a financing round.

Recapitalization

A technique for acquisition used in private equity. The technique rebalances a company’s mixture of equity and debt and can relieve the owner of personal guarantees and/or help defend against a hostile takeover.

Reserves

Capital that funds set aside for future investments in a company after an initial investment. In venture capital, funds often reserve an amount equal to the initial investment to maintain proportionate shares during future financing rounds.

Residual Value

The market value of the remaining equity in a fund. This is the net value of the fund’s assets after subtracting the fund’s liabilities.

Revolving Credit

A type of credit without a fixed number of payments that allows the borrower to drawdown and repay irregularly with an agreed limit.

Risk

The inherent uncertainty and variability surrounding outcomes and the measurable likelihood of loss or underperformance. The lack of liquidity in private company shares may be considered a risk by certain investors but can be mitigated with good corporate governance.

Risk Capital

Funds that are allocated for investments that are typically high-risk, high reward. Venture capital that funds a promising start-up is risk capital.

S

Second Stage Capital

The capital provided to a company to meet its need for increased marking and working capital. These companies have started operations but don’t have the cash flows needed to continue growing.

Secondary Public Offering

Sales of shares after the initial public offering (IPO). If the issuer creates new shares, this is a dilutive offering.

Secondary Purchase

A purchase of company stock from one of its shareholders rather than direct purchase from the issuing company.

Securitization

A debt structure that allows issuers to accelerate cashflow on an underlying asset. Typically, a company will securitize its future trade receivables and an investor will sell loan receivables.

Seed Capital

The money required to begin developing an idea for a new business or product. The funding comes from private investors in exchange for equity in the company or a share of potential profits.

Seed Stage

The financing required between concept and Series A, when entrepreneurs pitch investors to fund their new business idea.

Series A

A company’s first substantial round of private equity financing. Series A financing follows Seed and takes place after a company has demonstrated a viable business model.

Shareholder

A shareholder is a private individual, company, fund or financial institution that owns shares in a company.

Shareholders essentially own the company and seek dividends and share price appreciation in return for their invested capital.

Shareholders can be passive or, in the case of private companies, more active such as being elected onto the board of directors, seeking monthly updates, etc.

Shareholder Agreement

A legal agreement between shareholders that outlines how the company should be run and describes the shareholders’ rights and obligations.

Silent Partner

An individual in a partnership who contributes capital to a business but rarely gets involved in the company’s daily operations or management meetings.

Sovereign Wealth Fund

A state-owned investment fund that invests in asset classes such as private equity, stocks, fixed income, real estate, commodities and funds.

Special Purpose Vehicle

An entity which is created to have a separate legal status and financing. Often used to ringfence assets, such as a holding company in securitization or preventing bankruptcy in one operation affecting the parent company and its investors.

Start-up

A company in its early stage of development, usually undertaken by an entrepreneur to create and scale a business model.

Step-up Multiple

The increase in a company’s valuation between financing rounds, calculated by dividing the pre-money valuation of the current round by the post-money valuation of the previous round.

Subordinated Debt

A bond or loan that ranks below senior debt in the event of default.

Syndication

When a group of VC/PE firms each contribute a portion of the amount needed to fund a company. 

T

Tag-Along Rights

Rights that enable a minority shareholder to participate in the sale of shares by a majority shareholder to a third party on the same terms.

Take-Private

When a buyout fund acquires a public company and it is delisted from a stock exchange.

Term Sheet

A written, non-binding agreement that describes the key terms and conditions related to an investment.

Third Stage Capital

Enterprise capital provided to support continued expansion and development after production and baseline marketing are already operational.

Total Shareholder Return

The total return from a company to a shareholder over a defined period based on dividends paid and appreciation of the share price.

Total Value to Paid In

The current value of a fund’s remaining investments plus the value of all distributions relative to the capital paid into the fund by limited partners.

Trade Sale

A common exit strategy in private equity in which shares are sold to industry investors, which often facilitates faster due diligence and closing.

Tranche

Tranches are segments created from larger pools of securities (typically debt) that are grouped by different characteristics, such as risk, that can be marketed to a wide range of investors seeking different opportunities.

Transaction Fees

The amount charged by private equity firms for a company acquisition.

Turnaround

An uptrend reversal after a company experiences a period of poor performance.

V

Venture

A start-up or otherwise risky enterprise company, often with high growth potential to match the high risk. 

Venture Capital (VC)

The money and resources (including expertise) made available to start-ups and other emergent businesses with significant growth potential.

Venture Capital Firm

The investment management company with the role of general partner that invests money from wealthy individuals and institutional investors in the private equity of start-ups and other emergent opportunities.

Venture Capital Fund

The legal entity venture capital firms create to pool investor money and invest in companies with growth potential. The structure, investment targets, governance, and other key data about the fund will be contained in a prospectus.

Venture Capitalist

An equity investor that provides capital to start-ups or small companies.

Venture Debt

A type of debt financing for early and growth stage companies that either need increased flexibility or lack the immediate cash flow for traditional forms of financing.

Vesting

A legal term that describes when a payment, asset, or other benefit becomes an unconditional right.

Vintage Year

The year in which a fund started investing, specifically when the fund first deployed capital to a portfolio company or project.

Vulture Capitalist

Slang for an investor who seeks to acquire distressed or dying companies with the goal of making a profit in a quick turnaround by any means necessary.

W

Warehouse Line

A short-term, revolving credit used to bridge short-term funding requirements.

Warrant

A security that grants the holder the option to purchase shares in a company at a specified price for a period of time.

Weighted Average Cost of Capital

The calculation of a company’s average funding cost based on a proportionate weighting of debt and equity instruments. Often used by companies when fundraising.

Working Capital

The operating liquidity required by a company for its day-to-day operations, usually funded by debt such as overdraft or revolving credit.

Write-off

An accounting action that reduces a portfolio company’s value to zero or a nominal amount.

That’s all you need to know when you take the decision to enter the world of Private Market investments. You can bookmark this glossary and visit it whenever you feel the need to refresh your knowledge.