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Private Equity Terms

 
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Capital Call – the process by which a private equity fund requests cash contributions from limited partners in order to make investments.

Carried interest - the share in the capital gains of a private equity fund which is allocated to the general partner.

Clawback – a clause in the agreement between the general partner and the limited partners of a private equity fund. The clawback gives limited partners the right to reclaim a portion of disbursements to a general partner for profitable investments based on significant losses from later investments in a portfolio.

Commitment – the aggregate amount of cash a partner agrees to contribute as capital to a fund.

Direct fund investing – strategy employed by various types of investors with in-house staff, access to top-tier funds and ability to build own portfolio (e.g. Harvard Endowment).

Distressed debt – the bonds of a company that is either in or approaching bankruptcy. Some private equity funds specialize in purchasing such debt at deep discounts with the expectation of exerting influence in the restructuring of the company and then selling the debt once the company has meaningfully recovered.
 
Distribution – the transfer of cash or securities to a limited partner resulting from the sale, liquidation or IPO of one or more portfolio companies in which a general partner chose to invest.

Drawdown schedule – an estimate of the gradual transfer of committed investment funds from the limited partners of a private equity fund to the general partners.

Earnings before interest, taxes, depreciation and amortization (EBITDA) – a measurement of the cash flow of a company. One possible valuation methodology is based on a comparison of private and public companies’ value as a multiple of EBITDA.

Exit strategy – the plan for generating profits for owners and investors of a company. Typically, the options are to merge, be acquired or make an initial public offering (IPO). An alternative is to recapitalize (re-leverage the company and then pay dividends to shareholders).

Fair value – a financial reporting principle for valuing assets and liabilities, for example, portfolio companies in venture capital fund portfolios. This has received much recent attention as the Financial Accounting Standards Board (FASB) has issued definitive guidance (FAS 157) on this long standing principle.

Fund-of-funds – a fund created to invest in private equity funds. Typically, individual investors and relatively small institutional investors participate in a fund-of-funds to minimize their portfolio management efforts.

General partner (GP) – a class of partner in a partnership. The general partner retains liability for the actions of the partnership. In the private equity world, the GP is the fund manager while the limited partners (LPs) are the institutional and high net worth investors in the partnership. The GP earns a management fee and a percentage of profits.

Holding period  – amount of time an investment remains in a portfolio

Internal rate of return (IRR) – the interest rate at which a certain amount of capital today would have to be invested in order to grow to a specific value at a specific time in the future.

J-curve – a concept that during the first few years of a private equity fund, cash flow or returns are negative due to investments, losses, and expenses, but as investments produce results the cash flow or returns trend upward. A graph of cash flow or returns versus time would then resemble the letter “J.”

K-1 – the U.S. Internal Revenue Service K-1 is the tax schedule used to report income and other distributions from partnerships, S corporations and some estates and trusts.  Most private equity funds are formed as partnerships and send investors K-1s annually for tax filing purposes.
 
Leveraged buyout (LBO) – the purchase of a company or a business unit of a company by an outside investor using mostly borrowed capital.

Limited partner (LP) – an investor in a limited partnership. The general partner is liable for the actions of the partnership, while the limited partners are generally protected from legal actions and any losses beyond their original investment. The limited partner receives income, capital gains and tax benefits.

Management fee – a fee charged to the limited partners in a fund by the general partner.  2% is typical.

Oversubscription – when demand exceeds supply for shares of an IPO or a private placement.

PIPE – acronym for “private investment in public equities.”

Realized investments – Realized investments of a fund have been exited and have generated cash, either through a sale of the company, an IPO or a recapitalization.  It may include holdings that a fund has written off as worthless.

Return multiple – The sum of distributions received by an investor plus any remaining new asset value, divided by cash invested, represent the return multiple.  Like internal rate of return (IRR), the return multiple is another measure of how much an original investment has increased.

Secondary fund interest – Secondary fund interest refers to ownership in a fund interest that is acquired from an original investor in a private equity fund.  These interests are usually purchased at a discount to the aggregate value of any remaining underlying companies.  They also tend to have a shorter time horizon than a primary fund investment.

Unrealized multiple – Unrealized investments are still held by a fund using FASB 157.  The companies are either valued at cost, at the value of a company’s most recent round of financing or at a multiple of earnings or cash flow.

Valuation – Represents the determination of the market value of a particular investment opportunity.

Vintage year – The year in which a private equity fund has its first closing on commitments.  Vintage year is used to compare the returns of buyout and venture capital funds to peer groups.
Robert Morgan

Robert Morgan

Managing Director, Alternatives
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Robert Morgan

Robert Morgan

Managing Director, Alternatives
 

Robert P. Morgan is Senior Vice President and Managing Director of Northern Trust Alternatives Group, with management responsibility for the alternative asset investments areas of Northern Trust. He had previously been Director of Private Equity, a position he held since co-founding the Private Equity funds group in 2000, and an area in which he remains heavily involved.

Prior to joining Northern Trust, he worked as a Director at Frye-Louis Capital Advisors, LLC (FLCA), a Chicago-based private equity investment manager, and was responsible for all of the operations of FLCA, including the management of a private equity fund-of-funds. Prior to joining FLCA, Bob worked for Heller Financial, Inc. (Heller), a middle-market commercial finance company, which was later acquired by General Electric. Bob was a Senior Vice President at Heller and was responsible for its private equity programs. Within Heller, Bob held several roles, including positions in the Corporate Finance Group, Corporate Credit and Heller Equity Capital Corporation, Heller’s captive private equity fund. He has invested in over 100 private equity funds covering the buyout, venture capital, structured high yield, real estate and international markets. While at Heller, Bob also oversaw a direct equity co-investment program which totaled approximately 20 investments. Prior to attending business school, Bob worked for a commercial bank in North Carolina.

Bob sits on the board of the Illinois Venture Capital Association and several fund advisory boards. He received his B.A. in economics from Wake Forest University and an MBA from Emory University.

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Investment Products and Services are:

Not FDIC INSURED; May lose value; No bank guarantee

1) Investment advisory services are offered by Northern Trust Investments, N.A., an investment advisor registered with the U.S. Securities and Exchange Commission and subsidiary of Northern Trust Corporation.

2) An investment advisor typically is deemed a fiduciary under the Employee Retirement Income Securities Act of 1974 and must act with strict honesty and candor solely in the interest of the participants of the plan.

3) Securities products and services including brokerage activities are offered and sold by Northern Trust Securities, Inc. (member FINRA (FINRA)/SIPC), a subsidiary of Northern Trust Corporation.

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