Aggregation (Netting) – A portfolio view of the partnership when computing the carried interest (profit split) between the general partner and its limited partners.
Alternative Investments – Investments that are privately-held and illiquid. These investments may include venture capital, growth equity, buyouts, mezzanine financing, and other investment strategies that are not based on public market activities.
Carried Interest – The profits generated from investment activities in a partnership. In a partnership, the typical profit split between the general partner and limited partners is 20 percent and 80 percent, respectively.
Clawback Provision (Look-back Provision) – A provision within the partnership agreement that allows for a review of the total profit distributed by the partnership at the end of a defined period. The clawback is a mechanism to recapture overpayments to the general partner or its limited partners if either party received more than their stated carried interest.
Commitment – A general partner’s or limited partner’s legal obligation to provide a certain amount of capital to a partnership.
Corporate Restructuring (Buyouts) – Investments in the form of equity and/or debt of a public or private company designed to restructure the current capital structure of the company, including debt and equity buybacks, exchange offers and refinancings. Related terms include leveraged buyouts, management buyouts, employee buyouts, and buy-and-build strategies.
Distressed Securities – Debt or equity securities of companies that are in financial distress. These securities tend to trade at significant discounts and attract investors that perceive a turnaround.
Distribution Policy – A term within the partnership agreement that describes the process and priorities of how proceeds are distributed as investments are liquidated.
Due Diligence – The process of investigating, evaluating, and analyzing a potential investment’s characteristics, investment philosophy, and terms and conditions.
Employee Buyout – The purchase of a majority interest in a company by that company’s employees.
Expansion Capital (Growth Equity) – Investment in an established company for the purpose of growing its business.
General Partner – The manager of a limited partnership. The general partner has full responsibility for investing the capital. The general partner also bears personal liability for any lawsuits that arise from the investment’s activities, but is often indemnified by the fund.
Hurdle Rate (Preferred Return) – A term in the partnership agreement that describes a minimum return that is paid to the limited partners before the general partner receives any share of the profits.
Key-Man Provisions – Provisions in the partnership agreement that address the limited partners’ concern for potential turnover of certain named individuals or the retention of a specified percentage of the original members.
Leveraged Buyout – The purchase of all or part of the stock or assets of a company through the use of debt with some equity capital. The company may be privately- or publicly-owned, or a subsidiary or division of a privately- or publicly owned company.
Limited Partner – An investor in a limited partnership. Limited partners provide the capital, but have no direct involvement in the day-to-day management of the fund. Limited partners have limited liability, but also have limited control over the management of the fund.
Management Fee – The fee paid to the general partner to cover the expenses of managing a fund. Fees cover expenses such as salaries, travel and office expenses, and costs of developing and monitoring investments. Management fees are typically paid out of a fund’s committed capital and are generally returned before the profit is split with the general partner.
Special Situations – A term used to describe non-traditional investment strategies that are typical in private equity. Such non-traditional investment strategies include, but are not limited to, mezzanine strategies, active minority positions, governance strategies, sector-specific strategies, and other strategies that may use unconventional instruments such as debt arrangements, collateralizations, corporate joint ventures, credit enhancements, leasing, offbalance sheet financings, etc.
Venture Capital – The financing of rapidly-growing companies that do not have access to public equity or debt financing. Early-stage venture capital may involve financing a company during its initial years when assets may be limited and when there may be no revenues. Late-stage venture, sometimes referred to as growth equity or expansion capital, may involve financing a company that has established products or services and revenues.
Vesting Schedule for the General Partners – The vesting schedule refers to the period of time from the fund’s inception date to the date to which the general partners are eligible to receive their share of the carried interest.
Vintage Year – The year in which the first capital drawdown of the partnership occurs.