The Essential Terms of Private Equity

• Fundraising: The process by which a company raises capital from investors to finance its growth.

• Private Companies: Companies that are not listed on stock exchanges, hence less accessible but often more promising.

• Equity Stake: Shares held by an investor in a private company.

• Dividends: Earnings distributed to shareholders based on the profits made by the company.

• Exit: The sale of an investor's stake, typically with a significant profit.

The Key Steps and Financial Concepts

• Due Diligence: The audit and evaluation process before investing in a company. It includes reviewing finances, operations, and risks.

• Closing: The final step where agreements are signed, and funds are transferred to formalize the investment.

• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): Earnings before interest, taxes, and amortization, often used to assess a company's profitability.

• Investment Multiple: The ratio between the amount initially invested and the amount recovered at exit (e.g., x2, x3).

• Pre-Money/Post-Money Valuation: The valuation of a company before or after a fundraising round.

The Stakeholders and Their Role

• LP (Limited Partner): A limited investor in a private equity fund. They provide capital but do not participate in management.

• GP (General Partner): The fund manager who decides where and how to invest the gathered capital.

• Business Angel: An individual who invests their own funds in startups in exchange for equity stakes.

• Family Office: An entity managing the financial and estate investments of a wealthy family.

• Venture Capitalist (VC): An investor specializing in financing innovative startups with high growth potential.

The Technical Terms and Acronyms

• IRR (Internal Rate of Return): Internal rate of return, a key measure for assessing the performance of a private equity investment.

• LBO (Leveraged Buyout): Acquisition of a company primarily financed by debt, with the company's assets often serving as collateral.

• Dry Powder: Uninvested capital still available in a private equity fund.

• MOIC (Multiple On Invested Capital): A ratio expressing the total performance of an investment (e.g., x2, x3).

• NAV (Net Asset Value): Net asset value, a measure of the total value of a fund's holdings.

• Clawback: A clause allowing the recovery of a portion of distributed profits if future performance does not meet expectations.

Conclusion

This glossary provides an overview of essential and technical terms in private equity. Whether you are a novice or experienced, mastering this vocabulary will help you better understand the strategies, performances, and stakeholders in this complex field.