A
Alternative Investments
This term describes non-traditional asset classes. They include private equity, venture capital, hedge funds, and real estate funds. Alternative assets are generally more risky than traditional assets, but they should, in theory, generate higher returns for investors.
Assets Under Management (AUM)
The total value of assets that a private equity firm, venture capital firm, hedge fund, real estate investment firm, or fund of funds manages and administers for itself and its clients.
B
Buyout Fund
Private Equity funds whose strategy is to acquire other businesses; this may also include mezzanine debt funds which provide (generally subordinated) debt to facilitate financing buyouts, frequently alongside a right to some of the equity upside.
C
Compliance
The state of being in accordance with the relevant national or regional authorities and their requirements. In the context of financial services, the most important compliance rules come from the Securities and Exchange Commission (US) or the Financial Services Authority (UK). Most large financial services companies have compliance teams whose role is to take an independent stance in making sure that the company is following all the necessary rules and regulations.
Compliance Management
The process of collection and evaluation of fund, client and investor data, including self-monitoring reports and verification to show whether the fund’s operations are in accordance with the compliance regulations issued by the Securities and Exchange Commission (US) or the Financial Services Authority (UK).
CRM
Acronym for Customer Relationship Management or Client Relationship Management. CRM is an industry term for software solutions that help businesses manage customer relationships in an organized way. An example of a CRM would be a system containing detailed investor, fund, and client information that a fund’s deal and/or investor relations teams can reference in order to maintain client relations, inform investors of fund performance, raise funds, manage the deal pipeline, etc.
D
Deal Flow
The measure of the number of potential investments that a fund reviews at any given period.
Deal Flow Management
The creation and maintenance of a flow of business proposals for evaluation and decision for financial backing in the private equity and venture capital industry.
F
Family Office
The organization that is created, often after the sale of a family business or realization of significant liquidity, to support the financial needs for a specific family’s high net-worth group. High net-worth families use family offices for a range of services, which include investment management, financial and estate planning, and services related to philanthropy, personal banking, family governance, trusts/administration and tax planning.
Fund
A vehicle for enabling pooled investment by a number of investors in equity and equity-related securities of companies (investee companies). These are generally private companies whose shares are not quoted on any stock exchange. The fund can take the form either of a company or of an unincorporated arrangement such as a limited partnership.
Fund Manager Monitoring
Encompasses the supervising activities and appropriate reporting in fund of funds or institutional investor structures. The process provides an ongoing verification of progress toward the achievement of fund objectives and financial goals.
Fund of Funds (FoF)
A fund that uses an investment strategy of holding a portfolio of other investment funds rather than investing directly in shares, bonds, or other securities. There are different types of fund of funds, each investing in a different type of collective investment scheme. Examples include hedge funds of funds (HFOF), private equity funds of funds, and real estate funds of funds.
Fund of Hedge Funds (FOHF)
A hedge fund which invests in other hedge funds. Just as a hedge fund invests in a number of different securities, a fund of hedge funds (FoHF) holds shares of many different hedge funds. These funds were designed to achieve even greater diversification than traditional hedge funds.
Fund of Private Equity Funds
A private equity fund that, instead of being used to make direct investments in companies, is distributed among a number of other private equity fund managers, who in turn invest the capital directly. Funds of funds often give individual limited partners access to funds from which they would otherwise be excluded. Also, by spreading the capital more widely, the risk to limited partners is reduced.
G
Gatekeeper
A specialist adviser who assists institutional investors in their private equity allocation decisions. Institutional investors with little experience in the asset class or those with limited resources often use gatekeepers to help manage their private equity allocation. Gatekeepers usually offer tailored services according to their clients’ needs, including private equity fund sourcing and due diligence through to complete discretionary mandates. Most gatekeepers also manage funds of funds.
General Partner
A partner who has unlimited personal liability for the debts and obligations of the limited partnership and the right to participate in its management.
H
Hedge Fund
A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%).
Hedge Fund Due Diligence
A term assigned to investigating a hedge fund in detail. This due diligence delves into more than just historic returns and their volatilities, but wants to understand a fund’s strategy and its risks, the fund itself, and the fund manager, and it does so with quantitative and qualitative research. Quantitative due diligence concentrates mainly on the strategy itself, while Qualitative due diligence concerns itself with characteristics of the fund and the fund manager.
I
Institutional Investor
An investor, such as an investment company, mutual fund, insurance company, pension fund, or an endowment fund, which generally has substantial assets and experience in investments. In many countries, institutional investors are not protected as fully by securities laws because it is assumed that they are more knowledgeable and better able to protect themselves.
Investor Relations
A central fund function acting as an information and communication interface between the fund’s management and its clients and investors.
Investor Relationship Management (IRM)
In the alternative assets industry, the process through which the company maintains communication and distributes information about the company, its funds, and its financial performance to existing and potential investors.
L
Leveraged Buyout (LBO)
Takeover of a company or controlling interest in a company, using a significant amount of borrowed money, usually 70% or more of the total purchase price. In LBO, the acquiring company uses its own assets as collateral for the loan in hopes that the future cash flows will cover the loan payments.
Limited Partner (LP)
An investor in a limited partnership (e.g. a private equity fund).
Limited Partnership
The legal structure used by most venture and private equity funds. The partnership is usually a fixed-life investment vehicle, and consists of a general partner (the management firm, which has unlimited liability) and limited partners (the investors, who have limited liability and are not involved with the day-to-day operations). The general partner receives a management fee and a percentage of the profits. The limited partners receive income, capital gains, and tax benefits. The general partner (management firm) manages the partnership using policy laid down in a Partnership Agreement. The agreement also covers, terms, fees, structures and other items agreed between the limited partners and the general partner.
M
Management Buyout (MBO)
A buyout in which the target’s management team acquires an existing product line or business from the vendor with the support of private equity investors.
P
Portfolio (Hedge Fund)
The combined security holdings of an individual investor or hedge fund. The objective of holding investments in a portfolio is to reduce risk through diversification.
Portfolio (Private Equity and VC)
A private equity or venture capital firm will invest in several companies, each of which is known as a portfolio company. The spread of investments into the various target companies is referred to as the portfolio.
Portfolio Management
The process of managing the assets of a private equity or hedge fund of funds, including choosing and monitoring appropriate investments and allocating funds accordingly.
Prime Broker
A broker which acts as a settlement agent, provides custody for assets, provides financing for leverage, and prepares daily account statements for its clients, who are money managers, hedge funds, market makers, arbitrageurs, specialists and other professional investors.
Private Equity
Private equity provides equity capital to enterprises normally not quoted on a stock market. Private equity can be used to develop new products and technologies, to expand working capital, to make acquisitions, or to strengthen a company’s balance sheet. It can also resolve ownership and management issues. A succession in family-owned companies, or the buyout and buy-in of a business by experienced managers may be achieved using private equity funding. Venture capital is, strictly speaking, a subset of private equity and refers to equity investments made for the launch, early development, or expansion of a business.
Private Equity Due Diligence
For private equity professionals, due diligence can apply either narrowly to the process of verifying the data presented in a business plan/sales memorandum, or broadly to complete the investigation and analytical process that precedes a commitment to invest. The purpose is to determine the attractiveness, risks and issues regarding a transaction with a potential investee company. Due diligence should enable fund managers to realize an effective decision process and optimize the deal terms.
Private Equity Fund
Entity that makes equity investments in companies that normally are not listed on the public stock market. The vehicles are structured as private investment partnerships in which only qualified investors may participate. Such funds typically charge a management fee of 1.5% to 2.5%, as well as an incentive fee of 25% to 30%. Most private equity funds employ lock-up periods of five to ten years, longer than those of hedge funds.
S
Secondary Fund
A partnership that specializes in purchasing the portfolios of investee company investments of an existing venture capital or private equity firm. This type of partnership provides liquidity for the original investors. These secondary partnerships, expecting a large return, invest in what they consider to be undervalued companies.
V
Venture capital (VC)
Funds made available for startup firms and small businesses with exceptional growth potential. These are typically raised by venture capital firms that invest in private companies that need capital to develop and market their products. In return for this investment, the venture capitalists generally receive significant ownership of the company and seats on the board.
Venture Capital Firm
An investment company that invests its limited partners’ money in startups and other risky but potentially very profitable ventures.