Alternative investments glossary

Alternative investments, in plain words.

The terms that keep coming up in private fund documents, decks and reports, explained briefly.

Introduction to alternative investments

Due Diligence: The process of reviewing a potential investment in order to determine its merits, uncover potential risks and assess investment suitability. The key areas that are typically analyzed are a fund's past performance, the team members and their experience, the fund's strategy, market opportunity, the attractiveness of the sectors, how deals are sourced and how value is created during the fund period.
Asset Allocation: The process of dividing investments among asset classes to optimize the balance between risk and reward based on investment needs.
Target allocation: pre-determined proportion of total assets to be invested in a specified asset class. An investor will seek to reach or maintain this target in the long term.
Asset class: Securities with similar features. The most common asset classes are stocks, bonds and cash equivalents.
Rebalancing: Increasing and reducing exposure to asset classes within a portfolio to reflect any changes in the expected long-term returns from asset classes.
Benchmark: A standard against which the performance of a fund or portfolio can be measured. Benchmarks are used to show a fund's relative performance compared to peers (e.g., same type of fund from the same vintage year) or a public index (e.g., S&P 500) over a given period of time.
Correlation: The degree to which the fluctuations of one variable are similar to those of another.
Active Management: An investment management approach where a manager aims to beat the market through research, analysis and their own judgement.
Passive Management: A style of investment management that aims to replicate the performance of a set benchmark.
Diversification: The practice of investing in a variety of investments. A Diversified portfolio can be a risk management technique and contains a mix of distinct assets and investments to offset losses from any single asset class, thereby lessening the impact on the overall portfolio.
Risk and Return: Describes the relationship between investment risk and investment return.
Assets Under Management (AUM): Total market value of all financial assets that an individual or financial institution manages on behalf of investors.
Liquidity: Ability for fund investors to subscribe and redeem units in a fund. The more liquid a fund, means the greater ease to subscribe and redeem units.
Leverage: the use of borrowed capital or instruments to increase the potential return (but also potential losses) of an investment, a simple example is a mortgage used in real estate transactions.
Distributions: The transfer of cash or assets that are dispersed to investors throughout the life of the fund.
Deal Flow: Deal flow refers to the rate or volume at which investment opportunities, such as potential acquisitions or investments in assets or companies, are presented to and considered by investors or dealmakers. It encompasses the process of sourcing, evaluating, and ultimately executing investment transactions. A strong deal flow is typically indicative of a healthy pipeline of opportunities and can be essential for investors seeking to grow their portfolios.
Vintage: A method to categorize private investment funds. A fund's vintage year refers to the year a private equity fund makes its first investment. Grouping private investment fund's by yearly vintages can help improve comparison between funds by removing or standardizing the effect of a particular year's macroeconomic environment.
LPs: Limited Partners, generally, institutional investors or qualified private investors are the ones who commit their capital to a fund and have no discretion over the choice of investments.
GP: General Partners manage a private investment fund, select its investments and attain capital commitments from Limited Partners.
Liquidity Premium: A liquidity premium is an incremental return that compensates an investor for owning an asset that is not highly liquid.
Value Creation: In the context of a private equity, a value creation strategy refers to a deliberate and structured plan employed by the General Partner (GP) after acquiring a portfolio company with the aim of enhancing the company's overall value within a defined period. This strategy involves implementing specific operational, financial, and strategic initiatives to drive growth, improve efficiency, optimize operations, expand market share, and increase profitability within the acquired company. The GP collaborates with management teams, leveraging their expertise, industry knowledge, and resources to execute value-creating measures, often with the goal of achieving a successful exit and maximizing returns for investors.
Pari passu: In finance and investments, it refers to a situation where two or more classes of securities or creditors have equal rights, claims, or priority to receive payments, distributions, or benefits. When assets or obligations are considered pari passu, they are treated equally, without preference or priority given to one over the other. For instance, in bankruptcy proceedings, creditors with pari passu claims would have an equal entitlement to the distribution of assets.
Blind pool: Money collected from several people which is put into a fund and invested for their profit. It is left unspecified which properties are to be acquired.
First-time fund: The first vehicle raised by a fund manager. Usually from a firm or fund management team that has not previously raised any funds.
Credit facility: Short-term loans provided by banks to private capital funds secured against the LP commitments in the fund.
Environmental, social and governance (ESG): The systematic inclusion of financially material ESG factors in investment analysis and investment decisions, with the goal of enhancing long-term, risk adjusted financial returns.
Private Markets: Private markets refer to the segment of the financial markets where investments are not publicly traded on stock exchanges. Instead, they involve privately negotiated transactions, often involving private equity, venture capital, real estate, and private debt. While alternative investments encompass a broader spectrum of non-traditional assets, private markets specifically pertain to the subset of those investments that are not publicly traded, involving ownership or participation in privately held companies or assets, typically with longer investment horizons and less liquidity compared to publicly traded assets.
Public markets: Public markets are where most individuals have access to buy and sell traditional investments such as the stocks of publicly listed companies, retail bonds, and exchange-traded funds (ETFs).
Inefficiency market: An inefficient market is one in which an asset's prices do not accurately reflect its true value, which may occur for several reasons. Inefficiencies often lead to deadweight losses. In reality, most markets do display some level of inefficiencies and in the extreme case an inefficient market can be an example of a market failure.
Market efficiency: Market efficiency refers to the degree to which market prices reflect all available, relevant information. If markets are efficient, then all information is already incorporated into prices, and so there is no way to "beat" the market because there are no undervalued or overvalued securities available.
Buy Side: The financial institutions of a free-market economy include a segment called the buy-side: firms that purchase investment securities. These include insurance firms, mutual funds, hedge funds, and pension funds, that buy securities for their own accounts or for investors with the goal of generating a return.
Sell Side: Unlike the buy-side, sell-side efforts do not include making a direct investment. Instead, they assist the investing market with all activities related to the sale of securities to the buy-side, such as underwriting for initial public offerings (IPOs), providing clearing services and generating research material and analysis.
Multi-Family Office: An independent firm that provides financial and personal services to multiple families and their generational members. The multi-family office approach, as contrasted with the single-family office approach, allows for families to appropriate family office services without the burden of financing a family office team.
Single-Family Office: Privately held company responsible for handling the wealth and investment management for an individual family and its generational members via dedicated staff and services. A single-family office generally requires a minimum wealth of between $300- $600 million in assets in order to justify the cost of staffing, software and maintaining a physical location.
High Net Worth Individual: An individual with an estimated net worth of $3- $10 million.
Ultra-High Net Worth Individual: These individuals are considered the 'ultra rich' with a net worth that exceeds the $10 million threshold.
OCIO: Outsourced Chief Investment Officers, or OCIOs, are third-party solutions providers who aim to serve as an extension of the client asset owner's team.
Endowments: A managed fund dedicated to supporting an organization, typically non-profit in nature and often a college or university.
Retail investor: A non-professional, unqualified, or non-accredited individual who purchases financial instruments for their own personal account.
Placement Agent: A financial intermediary or firm that assists private equity funds in raising capital from potential investors. The placement agent acts as a middleman between the fund managers (general partners) and institutional investors (limited partners).
Club Deal: A group of investors make a collective investment. Club Deals allow investors to take individually smaller risk positions while taking advantage of the club's collective financial resources.
Investment company: A corporation, trust or partnership that invests pooled shareholder dollars in securities appropriate to the organization's objective.
Investment Bank: An institution that acts as an agent or underwriter for corporations and governments issuing securities. Some also provide broker/dealer operations, as well as offering advisory services to investors. It facilitates mergers and acquisitions, private equity placements, and corporate restructuring.
Bank: A financial institution in which money is kept for commercial or savings purposes or is invested, used for loans, or exchanged. It mainly acts as a payment agent for its customers to lend and borrow money, as well as provide a variety of financial services.
Institutional Investor: Pension funds, insurance companies, endowments, charitable foundations, mutual funds and other non-bank financial institutions that are often key suppliers to private equity funds.
Gross Return: The return on an investment before management fees, success fees and expenses.
Net Return: The return on an investment after management fees, success fees and expenses.
IRR: Time weighted standard performance metric used for capital drawdown funds. Portfolio investments are bought and sold over time with several capital contributions and distributions. Time weighted projected performance metric that measures estimated percentage return from the project. Generally, you want a project to have an IRR that exceeds the cost of capital. This metric can be calculated with net present value (NPV), net cash inflow during the period, total initial investment costs, and the number of time periods the calculation is over. Financial metric used to measure the profitability of an investment that considers capital calls, management fees, and distributions.
Weighted Net IRR %: An aggregate IRR calculated by weighting each fund IRR with its fund size, effectively meaning that large funds have more impact on the weighted IRR than small funds.
TVPI: A return metric that describes the total capital distributed back to the investor + residual value left in the fund divided by invested capital.
DPI: The ratio of the capital that has been distributed back to investors relative to the capital that has been called from investors. It is calculated by dividing the amount of the cumulative distributions by the amount of capital that was paid in. DPI is expressed as a percentage and gives an investor insight into how much of the fund's return has been realized or paid back from the investment.
RVPI: A measurement of the total value of unrealized investments in a fund relative to the capital that has been called from investors.
MOIC: A measures investment returns by comparing the value of an investment on the exit date to the initial equity contribution.
PME: A method that converts public market returns to a benchmark that can be compared to private market returns.
NAV: Represents the value of the Fund's assets, minus the Fund's liabilities as well as expenses attributable to certain share classes. In all cases as described in the Prospectus and determined in accordance with the Valuation Policy.
GAV: Represents the current value of all assets held within an investment fund. It includes debt and equity positions but excludes acquisition and establishment costs. GAV can also be understood as the market value of all assets within a fund.
Annualized return: The amount of money an investment makes on average each year (expressed as a percentage). For example, over three years a fund delivers returns of 4%, 6% and 3% - its annualized return is 4.3%.
Cash on Cash Return: The cash return on investment compared to the amount of cash invested. Cash-on-cash return is the ratio of annual pre-tax cash flow to the total amount of invested cash, or equity.
Quartile ranking: This shows which quartile of the relevant peer group the fund falls into. When calculating the quartile ranking, equal weight is placed on IRR and multiple. Top-quartile funds are funds with an IRR or multiple equal to or above the upper-quartile benchmark; second-quartile funds are funds with an IRR or multiple equal to or above the median-quartile figures but below the upper-quartile figures, etc.
Hurdle Rate: A return level or benchmark that fund managers must exceed before they can receive performance fees or carried interest compensation.
Standard deviation: A measure of the variation of returns around the mean return. Standard deviation is the most widely used approximation of the risk of an individual investment or portfolio. A higher standard deviation indicates higher risk.
Closed end fund: A fund with a fixed life span that typically does not allow redemptions or the entry of additional investors after the initial formation of the fund. Closed-end funds typically acquire a portfolio of companies/assets during an initial investment period and do not invest the sales proceeds.
Open end fund: A fund with no finite life that allows the continuous entry and exit of investors and typically engages in ongoing investment purchase and sale activities.
Offshore Fund: An offshore-domiciled feeder fund designed for non-US and US tax-exempt investors that wish to subscribe via a separate offshore feeder company to avoid coming directly within the US tax regulatory net applicable to US taxable investors.
Onshore Funds: Investment funds established in the domestic country of the investor are known as Onshore Funds and are also referred to as "domestic funds". These funds are governed by the rules and regulations imposed by the local government. Banks, investment companies, and other financial institutions present in the country or state of origin manage them.
Joint venture: An arrangement where two or more parties agree to pool their resources for investment in a specific asset or company.
Listed fund: A fund that is publicly traded on a stock exchange and invests in assets or companies. This includes master limited partnerships (MLPs).
Unlisted fund: A fund that is not listed on a stock market.
Feeder fund: An investment vehicle that provides access, typically for a fee, to an underlying private market fund, usually at a lower investment minimum than required at the underlying fund. Generally, this allows investors with less capital to access an investment that would have otherwise been available only to large, institutional investors.
Fund of Funds: A fund that invests in other funds. Fund-of-funds can invest in primary funds or secondary funds. The purpose of these vehicles is to offer more diversification to a portfolio; however, they typically have an additional layer of fees.
Separate account: Customized investment accounts held with a fund manager that are financed by one institutional investor. The fund manager makes multiple investments from the account to meet the strategic and other portfolio management needs of the institutional investor.
SPV: A special purpose vehicle is a subsidiary created by a parent company to isolate financial risk. Its legal status as a separate company makes its obligations secure even if the parent company goes bankrupt. A special purpose vehicle is sometimes referred to as a bankruptcy-remote entity for this reason. These vehicles can become a financially devastating way to hide company debt if accounting loopholes are exploited, as seen in the 2001 Enron scandal.
Continuation Fund: A continuation fund is a private equity vehicle designed to extend the holding period of one or more assets from an existing fund that has reached or is approaching the end of its lifecycle.
Management fee: Payment due to a General Partner (GP) in exchange for the management of a fund. Management fees for closed-end funds typically have two phases: ·Investment Period: Management fees are charged to committed capital while the GP raises funds and finds portfolio companies to invest in. This is often the most intensive period for GPs as they scour the market for the best portfolio companies. ·Post-Investment Period: Once the fund has closed and portfolio companies are identified, management fees either step down or are charged with invested capital. This less expensive fee reflects the relatively lower-intensity work of value creation and exiting portfolio companies.
Management fee Offset: A management fee offset refers to a provision in an agreement, particularly in the context of private equity, where a fund manager's management fee is reduced or offset by certain fees or expenses incurred by the fund or portfolio companies. For instance, if the fund incurs certain transaction fees or expenses related to the acquisition or operation of portfolio companies, the management fee offset allows the fund manager to subtract those expenses from the management fee that would otherwise be payable by the investors. This provision effectively reduces the management fee by the amount of specified expenses, ensuring that the fund manager is not compensated twice for the same expenses — once through the management fee and again through separate fund expenses.
Carried Interest: The percentage of a private fund's investment profits that a General Partner (GP) receives as compensation. Also known as incentive fees or performance fees. Typically, a fund needs to or must meet a specific return (also known as a hurdle rate) before the manager earns carried interest (or "carry" for short). Carried interest aligns GP and Limited Partner interests by incentivizing GPs to earn a return above the hurdle rate.
Catch Up: A provision that allows a fund manager to retain a higher proportional amount of a fund's profits after a preferred return for investors is achieved, until the fund manager recoups its share of returns accrued. Investors typically receive 100% of the fund proceeds until the fund has achieved its preferred return. Once the fund reaches its preferred return, 50–100% of the next distributions will be allocated to the fund manager, until its return equals its prespecified share of distributions made to investors. After the fund manager is caught up, all remaining proceeds are then allocated between investors and the fund manager at the specified rate terms.
Rebate: A financial incentive provided by fund managers to investors, usually in the form of a partial refund of management fees or other incurred costs.
Total expense ratio (TER): Expenses is charged by the fund manager for their services in managing and operating an investment fund such as unit trusts. This is calculated by dividing the total cost of the fund by total assets; this is why TER is expressed as a percentage of a fund's net asset value (NAV).
Subscription fee: A subscription fee refers to the initial fee an investor pays to join or participate in an investment fund, such as a private equity fund or a hedge fund. This fee is typically charged when an investor subscribes or commits capital to the fund and can cover administrative costs, management fees, or other expenses associated with managing the investment.
Redemption Fees: The fee charged by the fund to investors redeeming their capital earlier than their designated redemption date.
Expense cap: An expense cap is a predetermined limit or ceiling on the total operating expenses that can be incurred by an investment fund. It represents the maximum percentage of a fund's average net assets that can be used to cover various operational costs, including administrative expenses, and other fees charged to investors.
High Water Mark: Mechanism that addresses the problem of managers being rewarded for poor performance. The high-water mark ensures that performance fees are based on the net new profits for each investor on an annual basis and that a manager does not collect a performance fee until previous losses have been recouped, at which time the high-water mark resets.
Subscription document: Is a legal document used in the investment process, particularly in private placements or when investing in alternative investments such as private equity, hedge funds, or venture capital. This agreement outlines the terms, conditions, and details of an investor's commitment to purchase securities or interests in an investment fund or offering. It includes crucial information such as the investor's details, the amount of investment, payment terms, representations and warranties, subscription terms, disclosures, and any associated risks or legal obligations. The subscription document is signed by the investor and serves as a formal commitment and agreement between the investor and the fund.
Limited Partnership Agreement: Abbreviation of Limited Partnership Agreement. Refers to the agreement governing the operation of a fund, which is typically organized as a limited partnership. The LPA is the central legal document of a private equity fund.
Private Placement Memorandum: A Private Placement Memorandum (PPM) is a legal document that provides detailed information to prospective investors about an investment opportunity, typically in a private placement offering. It contains essential information about the investment, including its terms, risks, financial projections, and the legal and regulatory framework, helping potential investors make informed decisions before committing capital to the investment.
Non-Disclosure Agreement: It is a legally binding contract or agreement between two or more parties that outlines the confidential information they share and restricts its disclosure to third parties. An NDA serves to protect sensitive or proprietary information from being disclosed, shared, or used without authorization. It defines the scope of the confidential information, the parties involved, the duration of confidentiality and the circumstances under which the information can be shared or disclosed to others. NDAs are commonly used in business negotiations, partnerships, employment contracts and when sharing proprietary information or trade secrets.
Schedule K-1 (K-1s): A tax form that reports profits and losses for limited partnerships. Many K-1s are delayed past the typical April tax filing date.
Valuation policy: A valuation policy is a set of guidelines, principles, and procedures established by an organization or an investment fund that outlines the methodologies, criteria, and processes used to determine the value of assets, investments, or holdings. This policy typically defines the standards and practices employed for assessing the fair market value or pricing of various assets, including stocks, bonds, derivatives, private equity, real estate, and other investments. Valuation policies aim to ensure consistency, transparency, and accuracy in determining the value of assets, often in compliance with regulatory requirements and industry best practices.
Side Letter: Side letter an agreement signed between the fund manager and (a) fund investor(s) outside the fund regulations. This usually does not involve any significant change in the fund regulations but rather adds precision, e.g. to ensure compliance with specific tax regulations.
Service Providers: The various third-party vendors and advisors that support the LP-GP relationship. Major service providers include fund administrators, law firms, accountants, tax advisors, consultants, banks, and software vendors.
Fund administrator: A person appointed by the Scheme or its AIFM responsible for the provision of Administration services to the Scheme.
Custodian: A custodian bank is a financial institution that holds customers' securities for safekeeping to prevent them from being stolen or lost. The custodian may hold stocks, bonds, or other assets in electronic or physical form on behalf of its customers.
Auditor: Entity responsible for reviewing and verifying the accuracy of a fund or firm's financial records to ensure they comply with accounting standards and tax laws.
Alternative Investment Fund Manager: Alternative investment fund manager (AIFM) is a company that manages alternative investment funds.
Liquidity risk: Illiquid securities carry higher risks than liquid ones, known as liquidity risk, which becomes especially true during times of market turmoil when the ratio of buyers to sellers is thrown out of balance. During these times, holders of illiquid securities may find themselves unable to unload them at all, or unable to do so without losing money. Illiquid securities also may demand a liquidity premium added to their price to compensate for the fact that they may difficult to dispose of later on.
Regulatory Risk: Regulatory risk is the risk that a change in laws and regulations will materially impact a security, business, sector, or market. A change in laws or regulations made by the government or a regulatory body can increase the costs of operating a business, reduce the attractiveness of an investment, or change the competitive landscape in a given business sector. In extreme cases, such changes can destroy a company's business model.
Credit Risk: Credit risk is the probability of a financial loss resulting from a borrower's failure to repay a loan. Essentially, credit risk refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection. Lenders can mitigate credit risk by analyzing factors about a borrower's creditworthiness, such as their current debt load and income. Although it's impossible to know exactly who will default on obligations, properly assessing and managing credit risk can lessen the severity of a loss. Interest payments from the borrower or issuer of a debt obligation are a lender's or investor's reward for assuming credit risk.
Operational Risk: Operational risk summarizes a company's uncertainties and hazards when attempting to do its day-to-day business activities within a field or industry. A type of business risk, it can result from breakdowns in internal procedures, people, and systems—as opposed to problems incurred from external forces, such as political or economic events, or inherent to the entire market or market segment, known as systematic risk. Operational risk management involves addressing potential weaknesses in an organization's staff, systems, and internal controls to prevent disruptions and financial losses. This type of risk can also be classified as a variety of unsystematic risks unique to a specific company or industry.
Interest-rate risk: The possibility of a reduction in the value of a security, especially a bond, resulting from a rise in interest rates.
Macroeconomics: Refers to the behaviors and drivers of an economy as a whole. Factors studied include inflation, unemployment, etc. As opposed to microeconomics: the behaviors of small economic units, such as individual consumers or households.
Microeconomics: Microeconomics is the study of how incentives and decisions impact resource allocation and distribution at an individual level. It explains why goods have different values and how individuals and businesses optimize production, exchange, and cooperation.
Inflation: General increase in prices and fall in the purchasing value of money.
Bank rate: A bank rate is the interest rate at which a nation's central bank lends money to domestic banks. This is often in the form of very short-term loans. Managing the bank rate is a method by which central banks can affect economic activity.
Secured Overnight Financing Rate: A proxy for the risk-free rate and the benchmark used for dollar-denominated loans and derivatives. SOFR represents the annualized interest rate for borrowing collateralized U.S. government treasuries overnight.
Recession: A downturn in economic activity, defined by many economists as at least two consecutive quarters of decline in a country's gross domestic product.

Key investment strategies

Capital Calls: A notification by the fund manager to the investors of the fund for cash required to fund investments or fees and expenses. Unlike mutual funds, whereby an investor puts their money into the fund upfront, private market fund managers call capital from investors when needed.
J-Curve: A trendline of returns reflecting an initial loss followed by sharp upward gain (forming a shape like a capital J) to above the original investment. The J-curve reflects the typical investor's experience in a private market fund, where it can often take several years for an investor to recoup their initial investment and benefit from any investment gains. The expected negative return profile of early years does not reflect negative performance of the fund, it reflects the operating expenses incurred during the first few years as the fund seeks to deploy capital.
Committed capital: The money that an investor has agreed to contribute to an investment fund.
Dry Powder: When associated with private capital, refers to capital that has been committed but not yet allocated. It is unspent cash that a fund is waiting to invest. Funds will sometimes hold cash on hand in order to quickly take advantage of investment opportunities during volatile markets.
Waterfall: In the context of private equity, a waterfall refers to the distribution mechanism that outlines how profits or returns generated by the fund's investments are allocated among different stakeholders, typically the Limited Partners (LPs) and the General Partner (GP). It specifies the order, timing, and priority of distributions, ensuring that the various parties receive their share of the profits based on the fund's performance and the terms outlined in the fund's partnership agreement. Waterfall provisions can be complex and often involve multiple tiers, such as the payment of management fees, return of capital, and the distribution of carried interest to the GP.
Deal by deal carried interest: Distribution schedule is applied on a deal-by-deal basis, and not at the fund level. The American schedule spreads the total risk over all the deals and is more beneficial to the general partners of the fund. This structure allows for managers to get paid prior to investors receiving all their invested capital and preferred return, though the investor is still entitled to these.
Fund as a whole carried interest: European or fund as a whole schedule is applied at an aggregate fund level. With this schedule, all distributions will go to investors, while the manager will not participate in any profits until the investor's capital and preferred return have been fully satisfied. A drawback is that the majority of the manager's profits may not be realized for several years after the initial investment.
Key Provision: A common clause within a fund's governing document to protect investors from adverse changes in investment management. Key-man provisions identify investment personnel who must be sufficiently involved with the fund's investment management. If the provision is breached due to insufficient involvement by key persons, then Limited Partners can vote to accept alternative key persons or wind down the fund.
GP removal: Most LPAs allow the limited partners to remove the general partner for "cause" (e.g., if the principals or general partner engage in embezzlement, fraud, bad faith, etc.). Usually, removing the general partner for cause requires the vote of at least 66.6% in interest of the limited partners. While it's less common for an LPA to permit the limited partners to remove the general partner without cause, some institutional limited partners require or expect to see this in the LPA. Normally, removing the general partner without cause requires the vote of at least 75% in interest of the limited partners.
GP Clawback: If, upon liquidation of the fund, the general partner has received more carried interest than it is entitled to (e.g., in the case of a few big wins initially followed by a number of investments that resulted in losses), the general partner must contribute the excess (less any taxes paid) back to the fund for distribution to the limited partners.
LP Clawback: This is a common term of the private equity partnership agreement. It is intended to protect the general partner against future claims, should the general partner of the limited partnership become the subject of a lawsuit. Under this provision, a fund's limited partners commit to pay for any legal judgment imposed upon the limited partnership or the general partner. Typically, this clause includes limitations in the timing or amount of the judgment, such as that it cannot exceed the limited partners' committed capital to the fund.
General Partner Commitment: It refers to the amount of invested capital that is expected from the general partner of a private equity fund. Limited partners expect the GPs to have "skin in the game" by committing some of their own money into the fund that they are raising. This commitment must be significant enough to ensure that the GP wins when the LPs win and feels the hurt alongside the LPs when returns fall short of expectation.
Minimum LP commitment: Most funds impose restrictions on the minimum commitment that LPs can make to the fund. As might be expected, the minimum required size tends to be larger for funds targeting larger amounts of total capital.
Recycling: If there is an exit from fund assets during the investment period, rather than distributing the capital to investors, the general partner can recycle or reinvest some or all of the proceeds. Typically, only an amount equal to the cost basis of the investment is recycled. Limited partners like recycling because during the investment period, the management fees are based on committed capital, so they get a discount on the management fee with investments made with recycled capital. It's also good for general partners, as they can earn extra carried interest on the additional investments made with recycled capital.
Investment Period: The initial period of a private market fund's life, typically ranging from three to six years, in which deals are sourced, and new investments can be made.
Cash Drag: A term that refers to the opportunity cost of a fund holding a portion of its assets in cash and cash equivalents to meet unfunded obligations, take advantage of future investment opportunities, or provide potential liquidity to shareholders. Cash drag is often associated with fund that offer periodic liquidity.
Distribution: Payment to the partners of profits and other amounts returned from investments made by the fund.
Recallable Distribution: A distribution to fund investors that a fund manager has the right to call again.
Gating Provisions: A gate provision refers to a statement in a fund's offering documents that establishes the fund manager's right to limit or halt redemptions. The prospectus or offering documents may provide more detail on a gate provision, such as scenarios where redemptions would be restricted or halted entirely.
Gate Percentage: Percentage of fund/investor's capital which can be redeemed from the fund at some time.
Hard Lock-up: A period of time in which investors are not permitted to redeem their investment in the fund.
Soft Lock-up: A period of time in which investors may withdraw their investment subject to a redemption fee.
No Fault Dissolution: Some fund agreements grant a right to investors to terminate the term of the fund early with supermajority consent (e.g. 75%) without the requirement of good cause or misconduct on the part of fund management. This is an important investor right in the Fund Governance context.
Investment strategy: Rules and processes designed to support the choice of assets by an investor, usually along the lines of potential returns, risk, and duration dimensions. An investment strategy is usually refined thanks to additional dimensions, such as the maturity of the underlying asset, its industrial sector, its geographical location, and the type of strategy to be applied in order to create value and generate profits.
Primary markets: Initial investment phase where capital is committed directly to private assets, such as private equity or real estate, to finance growth or operations. Unlike secondary markets, primary markets involve new capital inflows rather than the trading of existing interests.
Direct Investment: Company or asset acquired for investment purposes, that is not made through an investment in private funds or similar structures.
Co-Investment: Direct investment made by a limited partner in a company/asset backed by a fund. The limited partner therefore acquires two separate stakes in the company/asset: one indirectly through the fund and one directly in the company/asset.
Secondary markets: Refers to transactions in which an investor is buying an existing interest from a primary fund. The secondary market allows PE investors to make an early exit, liquidate assets or rebalance portfolios.
Secondaries fund: Transactions for buying interests in later-stage investments from private equity funds, established real estate property portfolios, and/or single assets from existing investors rather than making initial originations. In private equity, this type of investment spans across the complete company lifecycle from venture capital to private debt. For real estate, secondary investments occur in later phases of property development.
Direct secondary: The sale of an interest in a direct private equity investment or a portfolio of direct private equity investments to a new third-party investor. The buyer either manages the investment/portfolio or appoints a manager, typically a direct secondaries manager, to do so.
LP led: Secondaries are the original form of secondaries and, while their edge has slipped, still usually claim the lion's share of the private equity secondary market. In their most traditional instance, LP-led secondaries involve a distressed limited partner usually with an urgent need for liquidity. As such, they're willing to sell their assets – usually at a discount to the net asset value (NAV) – in order to free up liquidity. This is sometimes known as a "forced sellers" situation, where the need for liquidity overrules the longer-term value of the asset.
GP led: Refer to transactions in which the General Partner (GP) of a private equity fund initiates a secondary market process to provide liquidity options for existing investors (Limited Partners) or to restructure the fund. In these transactions, the GP typically transfers some or all of the fund's assets into a new vehicle, often referred to as a continuation fund, which allows existing investors to either cash out or reinvest alongside new secondary investors. This process is used to extend the holding period for high-potential assets, align interests among stakeholders, and maximize value creation.
GP stakes: It is the direct acquisition of a minority equity position in an alternative asset manager by another GP.
Denominator effect: The effect is when one portion of an investor's portfolio has a significant change in value, thus materially altering the overall allocation of the portfolio. As, for example, when public markets fall dramatically and more quickly than illiquid private market assets, investors may find themselves significantly overallocated to private markets. This denominator effect is a common driver of secondary transactions. Even if, perhaps, investors would still prefer to hold the investment, their portfolio allocation may be determined by investment committees or other agreements that require them to rebalance. The illiquidity of private capital makes this a more challenging process, pushing LPs to consider secondaries.
Inverse J-Curve: Describes an investment return pattern where strong initial returns are achieved early in the investment's lifecycle, often due to the acquisition of mature, income-generating assets or investments at a discount, as commonly seen in secondary private equity or infrastructure investments. Unlike the traditional J-Curve, where returns start negative due to upfront costs and improve over time, the Inverse J-Curve shows immediate positive returns that stabilize or decline as assets are exited or their value is fully realized. This pattern appeals to investors seeking quicker returns and reduced risk exposure.
Tail-end secondaries: When an LP purchases a stake in a vehicle that is approaching, or has exceeded, its anticipated lifespan.

Private equity

Private Equity: Funds that take full or partial ownership of companies with the goal of improving the business, increasing its value and then exiting at a profit via an initial public offering or sale to a strategic buyer or financial sponsor.
Leveraged Buyout: It is the acquisition of one company by another using a significant amount of borrowed money to meet the cost of acquisition. The borrowed money can be in the form of bonds or loans. The assets of the company being acquired are often used as collateral for the loans along with the assets of the acquiring company.
Growth Funds: Growth equity funds target companies that have potential for scalable and renewed growth. Unlike buyout funds, they usually take a minority stake with the intention of growing the business as much as possible. But - like buyout funds - the goal is to exit at a higher multiple.
Turnaround: Aims to revitalize companies with poor performance or those that are experiencing trading difficulties.
Private Investment in Public Equity (PIPE): Refers to the purchase of shares in a publicly traded company at a price below the current market value (CMV) per share. This investment approach is commonly utilized by investment firms, mutual funds and other accredited investors. In a traditional PIPE, common or preferred stock is issued to the investor at a predetermined price, whereas a structured PIPE involves issuing common or preferred shares through convertible debt instruments.
Take-Private: Transactions where a publicly traded company transitions to private ownership, with shares delisted from the public exchange.
Carve Out: The separation of a business unit from its parent company, often involving collaboration with a private equity firm to support its growth.
Add-on: A private equity fund or venture capital-backed portfolio company acquires a smaller company, or the assets of another company. This is typically to consolidate market position, or acquire proprietary technologies from competitors, and often involves acquiring smaller rivals.
Recapitalization: An investment that typically includes the restructuring of debt and equity, with a view to stabilizing the company's capital structure.
Follow-on Investment: When a private equity fund makes additional equity investments into a portfolio company in exchange for more equity. Follow-on investments are common for early-stage companies that require multiple rounds of fundraising to support rapid growth. Funding can be used to hire additional staff, scale production or for whatever else is needed to grow.
Balance Sheet: A condensed financial statement showing the nature and amount of a company's assets, liabilities, and capital on a given date.
Cash Flow Statement: A cash flow statement tracks the inflow and outflow of cash, providing insights into a company's financial health and operational efficiency. The CFS measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses. As one of the three main financial statements, the CFS complements the balance sheet and the income statement.
Income Statement: An income statement is a financial report used by a business. It tracks the company's revenue, expenses, gains, and losses during a set period. Also known as the profit and loss (P&L) statement or the statement of revenue and expense, it provides valuable insights into a company's operations, the efficiency of its management, underperforming sectors, and its performance relative to industry peers.
CAGR: Compound Annual Growth Rate. The year-over-year growth rate applied to an investment or other aspect of a firm using a base amount.
EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization: A measure of cash flow calculated as: Revenue – Expenses (excluding tax, interest, depreciation and amortization). EBITDA looks at the cash flow of a company. By not including interest, taxes, depreciation and amortization, we can clearly see the amount of money a company brings in. This is especially useful when one company is considering a takeover of another because the EBITDA would cover any loan payments needed to finance the takeover.
Total Enterprise Value: A valuation measurement used to compare companies with varying levels of debt. It is calculated as follows: TEV= Market Capitalization + Interest-Bearing Debt + Preferred Stock – Excess Cash.
Free cash flow: The cash flow of a company available to service the capital structure of the firm. Typically measured as operating cash flow fewer capital expenditures and tax obligations.
Return on Equity: The return on equity is a measure of a company's financial performance, which is calculated by dividing its net income by its shareholders' equity.
Price-to-book value: The ratio used to compare a company's share price with its book value (the book value is the actual value of the company assets minus its liabilities).
Price-to-earnings ratio: A ratio used to value a company's shares. It is calculated by dividing the current market price by the earnings per share.
Exit strategy: A plan which sets out how the investor and management team will sell their shareholdings in order to generate maximum return. A strategy can be driven by multiple factors, from the investment climate to industry trends to the types of likely buyers that exist for a business. Typical exit strategies involve 'trade sales', 'secondary buy-outs' and 'initial public offerings.
Merger: A firm sells a stake in one of its portfolio companies to another company as part of a merger of operations.
Sale to GP: A private equity-backed company is sold to another private equity/venture capital firm.
Sale to Management: The management team of the portfolio company buy it from the private equity fund.
Trade Sale: The portfolio company is sold to another company.

Venture capital

Venture Capital (VC): A form of private equity investment that focuses on early-stage, high-growth companies with significant growth potential.
Angel Investor: An individual who provides capital to one or more startup companies.
Lean Startup: A method used to validate a business concept quickly and cheaply when founding a new company or introducing a new product.
Corporate Venture Capital: A subsidiary of a large corporation, which makes venture capital investments.
Proof of concept: A demonstration of the product's viability. The proof-of-concept is a feasibility check, testing to see if the product should be funded and built. The proof-of-concept should demonstrate that the product or concept not only works but will fulfill customer requirements and that the customer will adopt it.
Minimum viable product: A product with a limited set of features that can attract early-adopter customers and validate a product idea. This occurs very early in the product development cycle, and the future product often looks completely different from the MVP.
Accelerator: Fixed-term programs that provide mentorship, valuable advice, and training for entrepreneurs. Oftentimes, these programs culminate in a pitch event.
SPAC: Special purpose acquisition company. A SPAC raises capital through an initial public offering (IPO) for the purpose of acquiring an existing operating company.
Pivot: The act of using experience and existing resources to transform a failed product or service into a successful one.
Product Market Fit: The extent to which a product satisfies a market demand.
A/B Testing: A testing compares two versions of an app or webpage to identify the better performer. It's a method that helps you make decisions based on real data rather than just guessing. It compares options to learn what customers prefer. You can test website/app layouts, email subject lines, product designs, CTA button text, colors, etc.
Disruptive: The creation of a new market that overcomes an existing one.
Scrum: An iterative product development method, often introduced to manage software development projects. In scrum-based projects, the team is self-directed with no specified project manager and a high level of communication is maintained between team members.
Sprint: A set time period during which milestones must be reached and work must be completed and ready for review.
Unique Value Proposition: A clear statement that describes the benefit of a product and how a product solves customer needs.
User Acquisition: The transition of an individual into a user of a product or service.
Quality Assurance: The process of determining whether or not a product meets required specifications and customer expectations.
Startups: A company in an early stage of development.
Pre Seed: This stage typically refers to the period in which a company's founders are first getting their operations off the ground, and is often funded by the founders themselves (or friends and family) to cover the costs of launching operations or developing a minimum viable product (MVP).
Seed: A startup company, which is in its early days of product development and fund raising.
Series A: Series A preferred stock leads on from the Angel/Seed Stages and is the first significant round of venture capital funding offered by a portfolio company to the venture capitalist. Series A preferred stock is convertible into common stock in certain cases such as an IPO or the sale of the company.
Series B, Series C, etc.: A mid-stage second round of financing provided by venture capitalists. Successive rounds are then termed Series C, Series D, and so forth, each offering preferred stock typically once a company has accomplished certain milestones in developing its business.
Pre-IPO: An investment in a company that is set to complete its IPO in the near future, often at a discounted price relative to expected IPO pricing amount.
Ideation: The creative process of generating, developing, and communicating ideas.
Validation: The process of determining whether your product is of interest to a given target market and if there is a demand for it.
Big Data: Refers to extremely large datasets, usually consisting of data from many sources and applications, that are too large and complex for traditional data processing software. These datasets are generated at high volume, high velocity, and in a wide variety of structures, and are used to identify patterns, trends, and insights that can be used in various applications across many industries.
Deep Learning: Is a method that enables computers to process data in a manner inspired by the human brain. Deep learning models have the ability to identify intricate patterns in various forms of data, such as images, text, sounds, and more, resulting in accurate insights and predictions. It is a subset of machine learning that utilizes artificial neural networks to learn from data. These models typically consist of interconnected nodes, similar to neurons in the human brain, organized into multiple layers.
Machine Learning: Is a branch of Artificial Intelligence that uses data and algorithms to gradually improve a software application's accuracy in predicting outcomes. ML algorithms use historical data to produce an estimate or prediction about a future pattern in that data. The three main types of ML are supervised, unsupervised, and reinforcement learning.
Natural Language Processing (NLP): Is a machine learning technology that gives computers the ability to interpret, manipulate, and comprehend human language. It works by combining computational linguistics (constructing human language models with software), machine learning (training a computer to improve its efficiency), and deep learning models (teaching computers to think like humans) to process speech or text.
Generative AI: Generative AI is a branch of artificial intelligence that enables users to generate new content, such as images, text, or music based on a variety of inputs and existing data. Generative AI models work by using neural networks to identify patterns and structures from data, using unsupervised or semi-supervised learning, to generate original content.
Cryptocurrency: Cryptocurrencies are digital systems that allow secure online payments using virtual tokens. These tokens, known as digital currency, rely on cryptography to ensure secure financial transactions and prevent counterfeiting. Cryptocurrencies operate on decentralized networks called blockchains, where each transaction adds a secure data block to the chain. The use of decentralized networks and cryptography makes cryptocurrency safer and more secure compared to government or bank currencies. Furthermore, cryptocurrency and blockchain enable faster and more accessible transactions globally. However, cryptocurrency is highly volatile.
Blockchain: Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. When a transaction occurs, it is recorded as a "block" of data in the ledger, which can't be changed. Each block is connected to the ones before and after it, forming a chain of data as an asset changes ownership. All network participants have access to the distributed ledger and its immutable record of transactions, and the network is completely decentralized, meaning there is no central authority over the ledger or network.
Metaverse: The term "metaverse" refers to the concept of a virtual reality space where people can interact with each other and digital objects in a collective virtual shared environment. It is often depicted as a fully immersive, three-dimensional virtual world, but it can also include augmented reality experiences that blend the virtual and physical worlds. It combines virtual and augmented reality with the internet and various emerging technologies to create such a world.
Web3: Is the third generation of the World Wide Web. Unlike its predecessors, Web 1.0 and Web 2.0, Web3 is designed to be decentralized and open to everyone. It is based on blockchain technology and Semantic Web advancements, which allow for meaningful connections between data on the web.
SaaS: Software as a Service (SaaS) - Is a subscription-based software licensing and delivery model. It is also referred to as on-demand, web-based, or web-hosted software. SaaS involves providing software applications over the internet as a service in a cloud computing framework. The software is hosted on remote servers, maintained and updated by the service provider. Users access it through web browsers, mobile apps, and APIs via a subscription service.
Platform as a Service: A cloud computing service that allows customers to develop, run, - and manage applications without having to build and maintain the required infrastructure.
FinTech: FinTech, or financial technology, consists of new technology that modifies, enhances, or automates financial services for businesses and consumers. It is generally composed of specialized software and algorithms that reduce costs and increase the safety and efficiency of financial operations. One of the most popular aspects of fintech is its use of blockchain as a decentralized trading platform for cryptocurrencies. Other applications include investment platforms that make investing faster and more accessible, payment and transfer apps that allow for fast, secure transactions between accounts, and robo-advisors that use algorithms to give financial advice or build and manage a financial portfolio. Fintech is one of the most rapidly growing industries and consistently responds to developments in other industries like Artificial Intelligence or big data.
Insurtech: Insurtech refers to insurance technology, or the use of tech innovations to optimize the insurance industry. These technologies include digital platforms, data analytics, machine learning, and other technologies to provide more accessible, efficient, and cost-effective solutions for all types of insurance. Examples of Insurtech applications include online insurance marketplaces, automated claims processing, data analytics for risk assessment, and usage-based insurance, which monitors customer behavior to provide relative insurance premiums based on their usage patterns. Along with optimizing the existing industry, Insurtech innovations have also developed new business models that have improved customer engagement and disrupted existing methods of insurance transactions.
Protech: Short for property technology, refers to the use of technology and innovation in the real estate business. It includes a wide range of digital solutions, software platforms, hardware devices, and data-driven techniques aimed at improving the way properties are purchased, sold, rented, maintained, and used. Virtual reality house tours, property management software, online property marketplaces, and smart home technologies are all examples of property technology.
Burn Rate: The rate at which cash is decreasing.
Run Rate: Annual recurring revenue without factoring in churn.
Churn Rate: Also known as retention rate, the churn rate is the annual percentage rate at which customers stop subscribing to a product or service. In this context, it reflects how many customers leave a startup annually, as a %.
ARR: A subscription metric that shows the yearly money that comes in every year from the life of a subscriber. ARR is a key metric for SaaS startups.
MRR: Monthly recurring revenue is predictable income that a business receives each month. Often a key metric in SaaS or subscription-based models.
Customer Acquisition Cost: The full cost required to acquire a customer.
Term Sheet: In venture capital, a document summarizing the details of a potential venture capital investment, which serves as the basis for a final business agreement.
Safe note: A type of convertible security. They are documents that early-stage companies use to help raise pre-seed or seed capital. This note acts as a legally binding promise to allow an investor to purchase a specified number of shares for an agreed-upon price at some point in the future. SAFE notes are quick and cheap to set up, so they are usually preferred for smaller rounds.
Anti-Dilution Agreement: A legal agreement ensuring that if further investments are made into a company or a sale occurs, the investor's shares are not diluted. This is primarily performed to protect the interests of early investors.
Lead Investor: A company's principal provider of capital, such as the entity which originates and structures a syndicated deal.
Cap Table: An overview of the ownership of a company across multiple funding rounds, usually in the context of a venture-backed firm.
Bootstrapping: Is a situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to found and build a company from personal finances or from the operating revenues of the new company.
Down Round: Fundraising that price a portfolio company at a lower valuation.
Up round: It is occurring when a startup raises capital at a valuation higher than in its previous funding round, reflecting increased investor confidence and perceived growth potential. This indicates that the company's value has risen, often due to improved financial performance, a growing customer base, or significant milestones achieved. Up Rounds are seen as positive signals, showcasing the startup's progress and potential for future success, with new investors paying a higher price per share compared to earlier rounds.
Unicorn: A tech company with a value higher than $1bn.
Blue Chip: Large, established, successful company occupying space.

Private debt

Private debt: Non-listed debt issues. May take the form of bonds, notes, or loans. Includes all non-bank lending.
Term loan: Bank loan for a specific amount that has a pre-determined repayment schedule as well as a floating interest rate.
Refinance: Revising or replacing an older loan with new debt offering more favorable terms for the borrower.
Revolving credit: A line of credit allowing the borrower to use funds when they are needed, depending on cash flow needs.
Bridge loan: A short-term loan providing immediate cash flow that is used until a company secures permanent financing. Loans are typically short term, relatively high interest, and backed by collateral.
Original Issue Discount: Issued to a bond or loan when the amount loaned or financed is less than face value. The OID amount that goes to the lender equals the difference between the original face value amount and the discounted price paid.
First lien: Primary rights of a creditor to sell the collateral property of a borrower that fails to meet the obligations of a loan contract.
Second lien: Debts that are subordinate to the rights of other, more senior debts issued against the same collateral.
Mezzanine Debt: A source of funding that uses preferred equity, convertible bonds or subordinated debt. Mezzanine debt ranks higher than common equity and below senior debt in the repayment priority. Mezzanine debt is a hybrid of debt and equity where repayment priority is lower than senior debt but positioned above pure equity investors. Given its hybrid nature, it can lean either more to debt or equity. In equity-like cases, there may be more opportunity for upside via warrants. Considered unsecured subordinated debt.
Preferred equity: It refers to ownership or equity in a firm. There are two types of equity: common stock and preferred stock. Preferred stockholders have a higher claim to dividends or asset distribution than common stockholders. The details of each preferred stock depend on the issue.
Common equity: Common stock represents shares of ownership in a corporation and a claim on profits. It is the type of stock in which most people invest. When people talk about stocks, they are usually referring to common stock. In fact, the great majority of stock is issued in this form.
Collateral: An asset or property that may serve as security for a loan. If a borrower fails to repay a loan according to the agreed terms, the lender may have the right to seize collateral to recover the outstanding debt. Collateral provides a form of assurance for the lender that often reduces the risk associated with the loan.
Secured loan: A loan backed by the borrower's assets, typically real estate, equipment, or cash flows etc.
Unsecured loan: A loan not backed by collateral or assets.
Recourse Loan: If a loan has not yet been fully repaid, a lender can collect items for the owed debt even after they have collected the collateral. This form of debt will also allow lenders the right to garnish wages and levy accounts.
Non-Recourse Loan: When a borrower defaults, lenders can only collect the agreed-upon collateral. An everyday example of non-recourse debt or loans involves the repayment of home loans. In case a borrower defaults, the bank is allowed to foreclose the home, but further legal steps can be taken to collect money owed on the loan.
Covenant: Relate to terms in a financial contract, such as a loan document or bond issue stating the limits at which the borrower can further lend. Covenants in religion often convey the binding relationship between a deity and humanity.
Covenant-lite: A loan with limited restrictions on the debt-service capabilities of the borrower, including fewer restrictions on collateral and payment terms than traditional covenants.
Direct Lending: Loans made by non-bank lenders directly to a corporate issuer, lenders generally hold these loans to maturity or refinancing. They're typically senior secured in the capital structure and offer floating rate coupons.
Real Estate Debt: Money borrowed to finance the purchase, development, or improvement of real estate properties. Real estate debt is commonly used by individuals, businesses and investors to acquire or enhance real estate assets. The debt instrument is secured by a specified real estate property as collateral. Real estate debt finances real estate acquisitions, refinancing and recapitalizations for all property types across myriad of sectors and locations.
Infrastructure Debt: Strategies tend to be less risky than other infrastructure strategies, targeting assets and/or infrastructure developers/owners, that produce regulated revenues for essential services or user revenues from assets with a monopoly position, as well as contracted assets. The risk/return exposure of the strategy depends on the type of debt provided, though most infrastructure assets are typically financed by senior debt and have simple capital structures.
Peer-to-Peer Lending: Loans that makes it possible for individuals to obtain loans directly from other individuals, without going through a bank or other financial institution.
Venture Debt Financing: A type of financing often used by early-stage companies that are looking to raise capital but do not yet have a proven track record of generating revenue. Unlike traditional forms of debt financing, venture debt is typically provided by specialized lenders who are willing to take on a higher level of risk in exchange for the potential of higher returns. This type of debt financing is typically used as a complementary method alongside equity financing.
Special situations: Refers to a unique investment opportunity involving borrowers facing financial, operational, or strategic challenges, often requiring tailored credit solutions or restructuring expertise. These situations typically arise from distress, event-driven scenarios like mergers or bankruptcies, or non-traditional financing needs that prevent access to conventional funding. Special situations are characterized by higher complexity and risk but offer the potential for significant returns through customized strategies and active management.
Distressed Debt: Is an investment strategy in which an investor acquires a significant portion of a distressed company's debt with the intention of gaining control over the company through a bankruptcy or debt restructuring process. The goal of this strategy is to use the ownership of the debt to influence the company's operations and management, eventually taking ownership and potentially turning the distressed company around for a profit. This approach involves the purchase of distressed debt, such as bonds or loans, at a discount and is often employed by investors with the expertise and resources to navigate complex bankruptcy proceedings and corporate restructurings.
Collateralized loan obligation: Is a single security backed by a pool of debt. The process of pooling assets into a marketable security is called securitization. Collateralized loan obligations (CLO) are often backed by corporate loans with low credit ratings or loans taken out by private equity firms to conduct leveraged buyouts. A collateralized loan obligation is similar to a collateralized mortgage obligation (CMO), except that the underlying debt is of a different type and character—a company loan instead of a mortgage.
Default: Default is the failure to make required interest or principal repayments on a debt, whether that debt is a loan or a security. Individuals, businesses, and even countries can default on their debt obligations.
Recovery: Debt recovery is when a loan – continues to go unpaid, and the creditor hires a third party, known as a collection service, to focus on collecting the money. Debt recovery is sometimes called loan recovery, but the purpose of both is exactly the same: find a way to make you pay back the money you borrowed.
Loss Ratio: Represents the ratio of the total credit losses experienced within a portfolio of loans or credit investments to the total value of the portfolio.
Duration: Measures how long it takes, in years, for an investor to be repaid a bond's price through its total cash flows. Duration can also be used to measure how sensitive the price of a bond or fixed-income portfolio is to changes in interest rates. A bond's duration is easily confused with its term or time to maturity because some duration measurements are also calculated in years.
LTV: A measurement of lending risk that is calculated by dividing the borrowed amount by the value of the underlying asset. Loans with high LTVs have less asset collateral and higher risk as borrowers are less likely to fully repay the loan in the event of a default.
Fico: A FICO score ranges from 300 to 850 and is used by lenders to assess borrowers' creditworthiness. A FICO score is a type of credit score based on information in a borrower's credit report that lenders use to assess credit risk and determine whether to extend credit. The higher the FICO score, the more likely a borrower will repay their debts on time.
Fixed-Rate: Where the interest rate on a loan remains the same for the life of the loan.
Floating Rate Loans: A loan or a mortgage, which has a variable interest rate for the entire term or a specified part of its term.
Base Rate / Floor: The minimum level reference rate a borrower pays in a floating rate loan.
PIK toggle: Refers to a type of payment made by issuing additional securities or debt instruments, rather than in cash. In PIK transactions, the issuer has the option to pay interest, dividends, or other obligations by providing additional securities or instruments instead of making cash payments. This mechanism allows the issuer to preserve cash in the short term and can be used in various financial arrangements, such as bonds, loans, or preferred stock, where the issuer can choose to make payments with additional securities rather than cash.
Bullet loan: Loan requiring a balloon payment at the end of the term. This arrangement anticipates a refinancing of the loan to meet payment obligation.
Sponsored: A deal involving a third-party purchase of a company, typically a private equity firm.
Non-sponsored: A direct loan transaction between a lender and borrower without involvement of a private equity sponsor.
Arranger: One or several commercial or investment banks that structures, arranges, and administers a syndicated loan.
Bilateral: Involving a single lender and a single borrower.
Bookrunner: Main underwriter or manager in a new issuance of a debt security.
Syndicated: A loan offered by a group of lenders that work together to provide funds to a single borrower.
Origination Fees: A fee paid by the borrower to the lender at issuance.
High Yield Bonds: Bonds that are rated below investment grade, so have a higher risk of default or other adverse credit events. They offer higher yields than investment grade bonds to compensate for the increased risk.
Investment Grade: Bonds with a high credit rating, meaning they generally have a relatively low risk of default.
Treasury Bonds: Treasury bonds are issued by the U.S. Federal Government. They are considered to be a relatively safe investment because the government can print money or increase taxes to fulfill its financial obligations.
Leveraged Loans: A type of loan that is originated to companies that already have considerable debt or poor credit history and tend to carry a higher risk of default, making the loan more expensive for a borrower.

Real estate

Real Estate: Is defined as the land and any permanent structures, like a home, or improvements attached to the land, whether natural or man-made. Real estate is a form of real property. It differs from personal property, which is not permanently attached to the land, such as vehicles, boats, jewelry, furniture, and farm equipment.
REIT: A private/non-traded or publicly traded company that owns, operates or finances income-producing real estate; required to distribute 90% of their taxable income to shareholders via dividends.
Land: Includes undeveloped property, vacant land, and agricultural lands such as farms, orchards, ranches, and timberland.
Assisted living: A property which has system of housing and limited care designed for the elderly who need some assistance with daily activities but do not require care in a nursing home.
Condominium: A large residential property complex comprised of individual units, where each unit is owned separately.
Industrial: A property designed for or used by companies or persons for manufacturing, warehousing, or assemblage of individual units, where each unit is owned separately.
Data center: A property that companies use to house their critical applications, data, and server functions.
Logistics: A property which is used for storage, order picking, and distribution of goods.
Mixed use: A property consisting of multiple asset types, usually involving commercial in some form.
Multi-family: A residential property in which more than one family/group lives.
Single family: A residential property purposed for one family/group.
Student housing: A residential property designed for students of a college, university, trade school, or non-profit organization for the purpose of providing rooms for sleeping and living.
Office: A room, set of rooms, or building used as a place for commercial, professional, or bureaucratic work.
Retail: A property that is used for a store, shopping center, or service business – a property used for the selling of goods.
Self-storage: A property where storage space (such as containers, lockers, and/or outdoor space) is rented to tenants, usually on a short-term basis.
Class A: Highest quality real estate properties in prime locations; often new construction or recently renovated.
Class B: Middle-quality, generally older, functional and usable space that may require some upgrades or renovations.
Class C: Lowest quality, old or outdated property that may not be operated or maintained well.
Initial Capitalization Rate: The rate of return on a real estate property based on the income that the property is expected to generate. Cap rate = Net operating income / Current market value (sale price) of the asset.
Single Asset Deal: A transaction involving the sale of a single building. Transactions involving business parks consisting of multiple buildings in one location are also considered single-asset transactions.
Portfolio Deal: A single transaction that involves the sale of multiple buildings.
Entity-Level Deal: A single transaction that involves the investment in or acquisition of an entity (e.g. a company or a REIT) to gain access to its real estate holdings, rather than acquiring the physical assets separately.
Core: A Core real estate fund invests mainly in income producing existing buildings. The fund will use low leverage, have no or very low development exposure and generate a high proportion of return through income. Tenants in these buildings are typically corporate or institutions with strong credit ratings. Lease terms are also typically 5 years or more, which provide income certainty.
Core Plus: A 'Core Plus' real estate fund can provide a combination of both 'growth and income' and is associated with a low to moderate risk profile. Core plus property owners typically have the ability to increase cash flows through light capital works programs to enhance the asset appearance, introducing management efficiencies to reduce operating costs or by increasing the quality of the tenants and rental income.
Value Add: A value add real estate fund may invest in any property type and aims to generate returns from a balance of rental income and capital appreciation. The fund may allocate part of its investments into development projects. Typically, the fund will also focus on actively managing the property and the property's income stream such leasing vacant space to reduce occupancy, repositioning or redeveloping the layout to make it more attractive to tenants and therefore increase rent.
Opportunistic: An opportunistic real estate fund typically uses high leverage, has a high exposure to development or existing buildings which require active asset management. The fund will aim to deliver returns primarily in the form of capital appreciation. The fund may invest in any markets or sectors and may be highly focused on individual markets or property types.
Build to Rent: Is a term used to describe a specific type of residential property development. These developments are purpose-built for renting, rather than selling to individual homeowners.
Buy and Hold Strategy: An investment strategy where the investor purchases assets with the intention of holding them for an extended period.
Flipping: Flipping refers to purchasing an asset with a short holding period with the intent of selling it for a quick profit rather than holding on for long-term appreciation. Flipping is most often used to describe short-term real estate transactions.
Sale-Leaseback: Arrangements that allow companies to free up capital, often by selling mission-critical properties and renting them back under a net lease contract from the new owner.
Entry Cap Rate: The capitalization rate (cap rate) for a real estate asset at the time of purchase. Also known as the going-in cap rate, the entry cap rate is calculated based on the property's purchase price and Year One net operating income.
Exit Cap Rate: An estimation of a property's future net operating income divided by its expected selling price at the time of sale. Also known as the terminal cap rate.
Gross Rental Yield: Measures the profit potential and return on a property investment before adjusting for operating expenses.
Net Operating Income: Net operating income is the expected income to be collected from the operations of properties after deducting all operation-related expenses. It expresses the profitability of real estate investments that generate income. It is calculated as real estate revenue minus operating expenses.
DSCR: A financial metric comparing a borrower's annual total debt obligations to its net operating income. Lenders use DSCR when a borrower applies for a loan (or to refinance an existing loan) to gauge a borrower's financial health and to determine the maximum loan amount. For example, in real estate, lenders use DSCR as an indication of whether a property can generate sufficient income to cover its mortgage payments.
LTC: The LTC is used in commercial mortgage financing and multifamily financing. The Loan-to-Cost Ratio can help to determine the amount of debt relative to the cost of purchasing a property, or the total cost of a project as a whole.
Price per square Foot: Is a calculation of the value of each square foot of area of a house, condo or any building. It is a simple but useful calculation that is mostly used to compare similar properties. The price per square foot can be calculated on the list price or the selling price.
Vacancy Rate: The vacancy rate is the percentage of all available units in a rental property, such as a hotel or apartment complex, that are vacant or unoccupied at a particular time.
Occupancy Rate: The ratio of space rented out or used to the total amount of available space.
Cost approach: The cost approach is a real estate valuation method that estimates the price a buyer should pay for a piece of property equal the cost to build an equivalent building. In the cost approach, the property's value is equal to the cost of land, plus total costs of construction, less depreciation.
FFO: Metric used to measure a company's recurring operating earnings. FFO is most commonly used to provide investors with a more accurate picture of the operating performance of their real estate or infrastructure company investment. It excludes the impact of certain items, including depreciation and amortization, as well as one-time income or losses from asset sales, that affect a company's net income for tax purposes.
Capital expenditures: Are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company. Making capital expenditures on fixed assets can include repairing a roof if the useful life of the roof is extended, purchasing a piece of equipment, or building a new factory.
Operating Expense: Ongoing costs associated with operating and maintaining a property. OpEx are made up of three main components: Property taxes, Insurance, Common area maintenance fees.
Weighted Average Lease Term: A metric in commercial real estate that measures how much contract rent is remaining at the property. Specifically, the WALT measures the weighted average remaining contract lease term for all tenants at a property. Generally rental income is used as the weight in calculating the weighted average. Weighted Average Lease Term is an important measurement for analyzing office, retail, and industrial properties.
Net Lease: An agreement where the tenant pays rent and at least some part of the facility's operating costs. Net lease properties tend to have high-quality tenants with long-term leases, simplifying management.
Single net lease: Tenant pays rent and property tax.
Double net lease: Tenant pays rent, property tax and insurance.
Triple net lease: Tenant pays rent, property tax, insurance, and maintenance.
Absolute triple net lease: Tenant pays rent and all operating expenses.
Foreclosure: Foreclosure is the legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of the mortgaged property and selling it.
1031 Exchange: A method for deferring taxes on the sale of a real estate investment property by directly re-investing sale proceeds in a "like-kind" real estate investment. It is named after section 1031 of the U.S. Internal Revenue Code.
721 Exchange: Allows investors to exchange an interest in an investment property (held in a Delaware Statutory Trust, or DST) for an interest in the operating partnership of a Real Estate Investment Trust (REIT) owning numerous properties without recognizing a taxable gain, so long as certain conditions are met.

Infrastructure

PPP: A collaborative arrangement between government entities and private sector companies to finance, build, and operate infrastructure projects or deliver services.
Concession-based PPP: A type of PPP where the private entity is granted the right to build, own, operate, and/or maintain a project and generates revenue by charging a usage fee.
Availability-based PPP: A type of PPP where the private entity delivers a public, social, or economic infrastructure project in return for regular government payments.
Build Own Operate (BOO): A collaborative model where the private sector constructs and manages a project, retains ownership, and offers the public sector the option to acquire the project later.
Infrastructure Development: The process of planning, constructing, and improving essential systems for economic activity, including public and private projects.
Public Infrastructure: Facilities and services owned and maintained by the government for public use.
Private Infrastructure: Facilities and systems owned and managed by private entities for profit.
Transportation Infrastructure: Assets related to the movement of people and goods, such as railways, mass transit, toll roads, bridges, tunnels, and airports.
Energy Infrastructure: Systems for producing, transmitting, and distributing energy resources, including renewable energy installations.
Water Infrastructure: Facilities for water supply, wastewater treatment, stormwater management, and irrigation.
Digital Infrastructure: Foundational systems for digital services, including data centers, communication networks, and cloud computing systems.
Greenfield: Involves assets or structures that do not currently exist and need to be designed and constructed, including maintenance post-construction.
Brownfield: Involves existing assets that require improvements, repairs, or expansion.
Renewable Power: Assets generating energy from replenishable sources, such as wind, solar, and hydro.
Decarbonization: Investments across sectors to reduce emissions for a net-zero economy.
Digitalization: Development of physical infrastructure to support the growth of the digital world.
Concession Period: A pre-defined timeframe for building, owning, operating, and/or maintaining infrastructure.
Mobility as a Service: An integrated transportation model combining multiple modes of travel into a user-centric platform.

Hedge funds

Hedge Fund: Privately managed investment funds that utilize sophisticated strategies in both the international and domestic markets. They're designed to potentially offset losses during a market downturn and often seek to generate returns higher than the benchmark.
Gross exposure: Gross exposure is calculated by adding the percentage of the fund's equity invested in short sales to the percentage of its equity used for long positions. In both cases, the exposures often exceed 100% because they do not account for the use of leverage.
Net exposure: Net exposure takes into account the benefits of offsetting long and short positions and is calculated by subtracting the percentage of the fund's equity capital invested in short sales from the percentage of its equity capital used for long positions. For example, if a fund is 125% long and 50% short, its net exposure would be 75%.
Average Month: The average of a fund's individual monthly returns. The average positive month provides an average of all months in which a return of zero or greater has been recorded. The average negative month is an average of all the months in which a loss has been recorded.
Best Month/Worst Month: The best month represents the highest net return achieved by the fund in a single month. The worst month represents the lowest net return achieved by the fund in a single month.
Distribution of Monthly Returns: An overview of the frequency of distribution of a fund's monthly returns. This provides an insight into the number of a fund's monthly returns that are close to the average return and the number that are extreme value (outliers).
Downside Deviation: Unlike standard deviation, this risk measure only takes account of returns that fall below a defined minimum acceptable return (MAR). The excess returns for each month (or other period) are calculated and those that are positive are taken as zero values.
Drawdown Length: The number of months between a fund's highest net asset value and its lowest net asset value (before recovering to its previous peak level).
Drawdown Period: A drawdown period represents the period of time when the fund net asset value has declined from a previous peak. The period ends when the fund's net asset value reaches its lowest point (before recovering to its previous peak). The lowest net asset value, and therefore the drawdown period, can only be determined once the fund has fully recovered to its previous peak net asset value.
Drawdown Size: The percentage loss that a fund incurs from its peak net asset value to its lowest net asset value (before recovering to its previous peak level).
Excess Return: Provides an indication of the degree to which the fund has been successful at adding value or meeting a hurdle rate. Calculated by subtracting a predetermined rate of return (such as a risk-free rate, minimum acceptable return, or benchmark return) from the net return of a fund over a specified period.
Risk-Free Rate: The theoretical return of an investment with no risk. This is subtracted from a fund's actual returns to generate the excess return. It is factored into statistics such as the Sharpe ratio to account for the assumption that any investment with a degree of risk attached should deliver greater returns than the risk-free rate.
Kurtosis: A measure of how peaked or flat a fund's return distribution is, relative to a normal distribution. Positive kurtosis indicates a peaked distribution, with returns close to the mean and a higher frequency of outliers (in the shape of very high returns or significant losses). Negative kurtosis indicates a flatter distribution, with frequent and moderate deviations from the mean. The kurtosis measure used is adjusted to give excess kurtosis, which represents the level of kurtosis in relation to a normal distribution. A normal distribution is an important assumption of statistics such as the Sharpe ratio.
Skew: A measure of the asymmetry of a distribution about the mean return. A positively skewed distribution is characterized by many low returns or losses and a few large returns. It is said to have a long right tail. A negatively skewed distribution is characterized by many high returns and a few low returns or losses. It is said to have a long-left tail. A normal distribution is an important assumption of statistics such as the Sharpe ratio.
Sharpe Ratio: Provides an indication of a fund's returns relative to its level of risk. Calculated by subtracting a predetermined risk-free rate from the annualized period return to generate the fund's excess return, then divided by the fund's volatility over the same period. In general, the higher the Sharpe ratio, the better the risk/reward characteristics of a fund and volatile returns are not necessarily bad, provided they are accompanied by a proportionally higher return.
Sortino Ratio: Provides an indication of a fund's returns relative to its level of downside risk. It is similar to the Sharpe ratio, but the Sharpe ratio can be negatively affected by volatility on the upside, as well as on the downside. In contrast, the Sortino ratio assumes that investors are tolerant of volatile returns if gains are being made. A fund's excess return (annualized return minus a pre-determined minimum acceptable return) is divided by its downside deviation below the minimum acceptable return.
Volatility: Measured by the annualized standard deviation of monthly returns during the specified period. An annualized figure is approximated by multiplying the standard deviation of monthly returns by the square root of 12 (for the number of periods in a year).
Year to date: The cumulative return of a fund during the calendar year.
Alpha: Refers to excess returns earned on an investment above the market or benchmark return. Alpha, along with best, is one of two key coefficients in the capital asset pricing model used in modern portfolio theory.
Beta: Describes the activity of an investment's returns as it responds to swings in the market. The market has a beta of 1.0, meaning that an investment fund or a security with a beta of 0.5 is expected to be up or down half as much as the market. Beta, along with alpha, is one of two key coefficients in the capital asset pricing model used in modern portfolio theory.
VAR: Is a statistic that quantifies the extent of possible financial losses within a firm, portfolio, or position over a specific time frame. This metric is most commonly used by investment and commercial banks to determine the extent and probabilities of potential losses in their institutional portfolios. Risk managers use VaR to measure and control the level of risk exposure.
CVAR: Conditional Value at Risk (CVaR), also known as the expected shortfall, is a risk assessment measure that quantifies the amount of tail risk an investment portfolio has. CVaR is derived by taking a weighted average of the "extreme" losses in the tail of the distribution of possible returns, beyond the value at risk (VaR) cutoff point. Conditional value at risk is used in portfolio optimization for effective risk management.
Omega: Is a risk-return performance measure of an investment asset. It measures the probability of gains versus losses for some thresholds of the return target. Calculated as cumulative probability of upside returns divided by the cumulative probability of downside returns. For example, the target return is 8%. • Omega = 0.5 means the cumulative probability of upside returns (>8%) equals half of the cumulative probability of downside returns (<8%). • Omega = 2 means the cumulative probability of upside returns (>8%) is twice the cumulative probability of downside returns (<8%).
Alternative Long Only: A strategy that takes exclusively long positions in equities but also utilizes more alternative characteristics such as the prudent use of leverage or the use of derivatives for hedging purposes only.
Alternative Risk Premia: Aims to generate returns above the risk-free rate by systematically investing in alternative sources of return or factors. The strategy igs actively managed and can invest long and short across multiple asset classes. This strategy tends to offer high liquidity to investors due to frequent trading and rebalancing.
Capital Structure Arbitrage: Funds that attempt to exploit the pricing inefficiency that exists in the capital structure of the same firm.
Commodities: Focused on investments in raw materials and/or primary agricultural products such as grains, meats and orange juice that can be bought and sold on a Commodities Exchange.
Convertible Arbitrage: Funds that attempt to exploit profits when there is a pricing error made in the conversion factor of the convertible security.
Directional: A strategy used by investors that open positions, either long or short, in the belief that they are able to correctly predict the movement of price in a security.
Equity market neutral: Strategy that seeks to exploit differences in stock prices by being long and short in stocks within the same sector, industry, market capitalization, country, etc. This strategy creates a hedge against market factors.
Event Driven: Strategy that seeks to exploit pricing inefficiencies preceding or following corporate events such as bad news, distressed situations, mergers & acquisitions, recapitalizations, or spin-offs.
Multi Strategy: An actively managed type of alternative investment that utilizes and invests in multiple asset classes and strategies, typically for the purposes of diversification and risk protection. Multi-strategy funds are characterized by their ability to dynamically allocate capital among different underlying strategies, including equity hedge, event-driven, credit, relative value, and global macro.
Algorithmic Trading: A method of executing orders using automated pre-programmed instructions using fundamental, technical, and alternative data to generate trading signals. This type of trading attempts to leverage the enhanced speed and computational resources relative to human traders.
Fixed Income: Approach where a manager invests primarily in bonds (also annuities or preferred stock) which come with a fixed rate of interest (coupon) payable to the bondholder at maturity. Such funds are often highly leveraged.
Fixed Income Arbitrage: Strategy that consists of the discovery and exploitation of inefficiencies in the pricing of bonds.
Insurance-Linked Strategies: Strategy linked to different forms of underlying insurance-related risk such as life/longevity products, natural catastrophes, and industry loss etc. This strategy offers little to no correlation with the capital markets.
Long Bias: Fund biased towards buying and holding securities such as a stock, commodity, or currency, with the expectation that the assets will rise in value.
Short Bias: Fund is biased towards the act of borrowing stock to sell high today with the expectation of buying it back at a lower price in the future and then returning the stock to the lender.
Long/Short Credit: Takes long and short positions in credit instruments such as investment grade, high yield, convertible, or distressed debt in order to take advantage of opportunities in these asset classes. Views based on credit analysis of issuers and securities.
Long/Short Equity: Buying undervalued stocks and selling short overvalued stocks (usually in the same sector). Long/short funds typically benefit from variable exposure (they can be net long, market neutral, or even net short) and the use of leverage.
Macro: Aims to profit from changes in global economies, typically brought about by shifts in government policy that impact interest rates, in turn affecting currency, stock, and bond markets.
Relative Value Arbitrage: Relative value strategies generate profits by capturing the spread between two closely related securities. For example, an investor can buy relatively undervalued off-the-run US Treasury Bills and simultaneously short relatively overvalued on-the-run US Treasury Bills with the same duration.
Risk/Merger Arbitrage: Form of arbitrage that typically involves the simultaneous purchase of shares in one company (the takeover target) and the short sale of shares in another (the acquirer). This strategy is typically used once a merger or acquisition has been announced and aims to capture the spread between the current price of the target's equity and the price offered by the acquirer.
Sector-Focused: A fund that invests solely in businesses that operate in a particular industry or sector of the economy.
Value-Oriented: Invests in securities perceived to be selling at deep discounts to their intrinsic or potential worth. Such securities may be out of favor or underfollowed by analysts.
London Interbank Offered Rate (LIBOR): The most commonly used benchmark for short-term interest rates. The LIBOR is fixed on a daily basis by the British Bankers' Association.
MSCI: An index created by Morgan Stanley Capital International (MSCI) that is designed to measure equity market performances.
Russell 3000: Market capitalization-weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of the entire US market. This index encompasses the 3,000 largest US-traded stocks.
S&P 500: An index from Standard & Poor, is a market-capitalization-weighted index of the 500 largest US publicly traded companies by market value.
Treasury Bill (T-Bill): A short-term debt obligation backed by the US Government with a maturity of less than one year.
Activist: Funds that generally buy a large enough part of a company to be able to actively participate in the management and decision-making, sometimes to catalyze change.
Bottom-up: The emphasis is firmly on the individual company in the belief that individual companies can thrive in spite of the non-performing industry in which it is based. This approach focuses on thorough due diligence and research of the target company.
Top-down: Approach that focuses on the industry as a whole in which targeted stocks are based. This approach puts emphasis on the significance of economic and market cycles on the value of stocks, thereby assuming that the industry must be performing for an individual company or stock in that industry to do the same.
Currency: Hedge funds that invest in currencies can implement a number of different strategies such as currency trading, currency options, and derivatives.
Derivatives: A security whose price is dependent on, or derived from, one or more underlying assets. The derivative itself is merely a contract between two or more parties. Value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates, and market indices. Most derivatives are characterized by high leverage.