Private Equity Definitions Quiz

Private Equity Terms and Definitions

• A start-up can raise capital by selling equity stakes to accredited investors, such as in the example where a start-up raises $5 million by selling equity stakes to five accredited investors.

Fund of Funds

• A Fund of Funds is an investment strategy where a fund invests in multiple other types of funds, such as a Private Equity Fund of Funds investing in venture capital, buyout, and mezzanine funds.

Direct Investment

• A Direct Investment is an investment directly into a single entity, bypassing any pooled mechanism like a fund, such as an institutional investor directly buying a 10% stake in a private company.

Dry Powder

• Dry Powder refers to unallocated capital that a private equity firm has available for investment, such as a PE fund with $100 million in committed capital but only $20 million invested, leaving $80 million in dry powder.

Capital Call

• A Capital Call is a demand by a private equity firm for a portion of the committed capital from its limited partners, such as calling 20% of the LPs' committed capital to finance an investment opportunity.

Clawback

• A Clawback is a provision that allows investors to reclaim part of the general partner's carried interest under certain conditions, such as when a fund loses money in later investments.

Distribution Waterfall

• A Distribution Waterfall is a legal framework outlining the process for distributing profits generated from an investment among the investors and the fund manager.

Anti-Dilution Provisions

• Anti-Dilution Provisions are contractual measures that protect an investor from dilution resulting from subsequent equity offerings at a lower valuation.

Exit Strategy

• An Exit Strategy is a planned approach to monetize an investment, often through a sale or IPO, such as a PE firm planning to exit an investment via a strategic sale to a larger competitor within 5 years.

Preferred Stock

• Preferred Stock is a class of stock with preferential treatment in terms of dividends or asset distribution, such as preferred stockholders receiving dividends before common stockholders.

Secondary Market

• The Secondary Market is the marketplace where previously issued financial instruments, like stocks and bonds, are bought and sold, such as the sale of an LP's interest in a fund to another investor.

Deal Sourcing

• Deal Sourcing is the process of identifying potential investment opportunities, such as a PE firm having an in-house team focused solely on sourcing deals or leveraging industry contacts.

Syndication

• Syndication is the process of involving multiple investors or lenders to fund a deal, such as in a large buyout where risks and returns are shared among investors.

Leveraged Buyout (LBO)

• A Leveraged Buyout (LBO) is the acquisition of a company primarily using borrowed funds, often secured by the assets of the company being acquired.

General Partner (GP)

• A General Partner (GP) is the individual or entity responsible for managing a private equity fund, making investment decisions, and often co-investing in the fund.

Limited Partner (LP)

• A Limited Partner (LP) is an investor in a private equity fund managed by a General Partner, providing capital but not participating in the day-to-day management of the fund.

Cap Table

• A Cap Table is a spreadsheet or table providing an analysis of a company's percentages of ownership, equity dilution, and value of equity in each round of investment.

Earn-out

• An Earn-out is a contractual provision stating that the seller of a business will receive additional payment based on the business achieving certain financial metrics.

Debt-to-Equity Ratio

• The Debt-to-Equity Ratio is a financial metric indicating the relative proportion of shareholders' equity and debt used to finance a company's assets.

Exit Multiple

• An Exit Multiple is a ratio used to estimate the expected payoff from an investment, usually calculated by dividing the exit enterprise value by certain financial metrics like EBITDA or revenue.