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While this list is by no means exhaustive or comprehensive, it’ll give you pretty deep insight into the language of the finance industry. The world of finance and investing can seem daunting, especially when you don’t speak the language. Here are some common terms to know about private equity.
A startup accelerator is a group or program that offers short-term, intense mentoring and other resources for selected startup companies. They usually don’t take ownership in startups and rely on other sources of funding (including charity) to fund operations.
- Accredited Investor
An investor with special status under financial regulation laws. In the U.S. this status is regulated under Regulation D, by the Securities and Exchange Commission (SEC). Accredited investors are granted additional privileges and usually must satisfy requirements to qualify, regarding:
- Net worth
- Asset size
- Governance status
- Professional experience
In the United States, a net worth of at least $1,000,000 (excluding the value of one's primary residence), or have income at least $200,000 each year for the last two years (or $300,000 combined income if married).
Only accredited investors are allowed to buy, sell, trade, or invest in securities that may not be registered with financial authorities, because they are considered inherently more risky because they lack the normal disclosures that come with SEC registration.
Accredited investors may include:
- Natural high net worth individuals (HNWI)
- Insurance companies
Mergers and acquisitions are transactions in which the ownership of companies are transferred, purchased, or consolidated with other companies or entities. M&A is a complex process that can make or break a company, or multiple companies, which is why SourceScrub delivers the best M&A platform to enhance private equity and venture capital investment strategy. SourceScrub’s M&A and deal origination tools:
Perform an easy TAM analysis as the market evolves to keep up with opportunities. SourceScrub employs best-in-class search and filtering functionality so that investment professionals can rapidly and accurately identify potential add-on acquisitions and uncover investment opportunities.
Search through our extensive up-to-date industry coverage list from within our platform to quickly enhance investment strategies with relevant business data. If you find a list we don’t have, leverage our team of 500+ researchers and get it scrubbed on-demand
SourceScrub helps maximize deal origination efforts by enhancing the ability to landscape the prospect playing field. Leverage key business and firmographic data points that meet the ideal investment thesis and apply them as filters against our extensive dataset of companies and sources
- Add-on Acquisition
An add-on purchase is a specific type of acquisition where the acquired company becomes a part or subsidiary of another purchasing company.
- Advisory Committee
Advisory committees are groups of people with knowledge and skills that are separate from a board of directors, often serving to enhance and complement the skills of a board.
Alpha is also known as the active return on investment. Alpha or ARoI gauges a given investment’s performance against a market index or benchmark juxtaposed with the market’s movement as a whole.
- Alternative Assets/Investments
Alternative investments and assets are financial assets that are not conventional income, stocks, bonds, certificates, or cash. Alternative assets and investments are such because it can be difficult to assess their liquidity. Examples of alternative investments include:
- Private equity
- Venture capital
- Hedge funds
- Real estate properties
- Tangible assets
- Angel Investor
An investor who provides money for a business startup, usually in exchange for debt or ownership equity. Angel investors usually play faster and looser than traditional investment firms.
- Annual Meeting
The annual meeting is the general meeting of an organization and its shareholders. They’re usually required by law or by a company’s constitution yearly.
- Antitrust Laws
Antitrust laws are the collection of laws that regulate corporate conduct and organization, usually with the goal of promoting competition for consumer benefit. Antitrust laws are applied to a wide range of predatory business activities, including:
- Market allocation
- Bid rigging
- Price fixing
- Asset Acquisition
Asset acquisition is a type of investment strategy that revolves around buying a company’s assets rather than its stock, and in doing so they assume certain liabilities. The transaction is different from a merger, combination, or stock purchase because the parties bargain over which assets will be acquired and which liabilities will be assumed. Reasons for an asset acquisition include:
- Promoting growth through external means as opposed to growth from within
- Regarding the assets of bankrupt companies
- Mature sector to advance incremental sales or profit growth
- Smaller firm to accelerate steps toward a size target
- Building economies of scale in an existing product or service line
- Reducing competition
- Moving into an adjacent market
- Penetrating another geographic market
- Benefiting from synergies
- Pre-empting a competitor that may be eyeing the same company
- Asset Allocation
A type of investment research and strategy that balances risk and reward through the adjustment of each asset in an investment portfolio. Most financial professionals agree that asset allocation is one of the most important decisions that investors make. The parameters for this adjustment are:
- An investor’s risk tolerance
- Time frame (Investment horizon)
- Asset Class
A group of financial instruments that have similar characteristics and behave similarly in a financial market. Some are associated with real assets, while others are associated with financial assets. The three main asset classes have different levels of risk and return, so each will behave differently over time. They include:
- Cash and equivalents
- Asset-Based Lending
Lending and loans that are given based on the security of an asset. Usually, if a loan is not repaid, the asset is taken by the loan giver. Mortgages and car loans are examples of asset-based lending.
- Assets Under Management (AUM)
Assets under management, or AUM, is the total sum that a financial institution or broker manages on behalf of their clients and themselves. Management fees and expenses are often calculated as a percentage of AUM.
The process of comparing business practices and performance across companies, usually with attention to quality, time, and cost.
Related to Alpha, beta is the measurement of asset movement to stock market increases and decreases. It’s useful for comparing the contribution of an individual asset to market portfolio risk.
- Blind Pool
Blind pools are direct participation investment programs that don’t have a stated investment goal, usually based around name or firm recognition.
- Book runner
The primary underwriter or lead coordinator in the issuance of new equity, debt, or securities instruments. They’re in charge of the “books.”
- The Bottom Line
The bottom line is a company’s income after expenses have been accounted for. This includes ALL expenses, a bottom line may also be referred to as net earnings or net profits.
- Bridge Financing
Bridge finance or bridge loans are financing options used in the short term until a long-term financing option can be found or arranged.
- Burn Rate
Burn rate refers to the rate at which a company is spending venture capital before they generate cash flow. It’s often measured in the amount spent per month.
The purchasing or acquisition of controlling interest in a company. Often means the same thing as acquisition. When debt is used to fund the buyout, the process is referred to as a leveraged buyout.
- Called Capital
Most people are probably familiar with this concept from their childhood. It’s not unlike calling shotgun for car trips, or calling the last slice of pizza. Capital calls are the legal right of an investment firm to “call” or demand a portion of the money promised by an investor. The call itself is the act of transferring the promised funds.
- Capital Commitment
A capital commitment is what a company commits to spending on long-term assets over time. It might also refer to funds promised by investors. Capital commitments may also include the securities inventories of market makers and investments in blind pool funds by venture capitalists. Risks associated with capital commitments include overextending an allocation of funds, with the possibility of a company not being able to meet other obligations.
The most common areas of capital commitments include operating expenses such as:
- Property-related costs
- Production materials
- Future business ventures
- Capital Gain
The profits earned from sale of stocks, bonds, or real estate. Capital gains are gains received over the original purchase price of a given asset.
- Capital Overhang
Capital that has not yet been called after fundraising. It can create problems, for instance, raising transaction values and affecting returns.
- Capital Under Management
See Assets Under Management.
- Carried Interest
Also known as carry, the share of profits in an investment that is paid to the investment manager. Essentially a performance fee.
- Cash Drag
Refers to cash in a portfolio rather than in investments. It can create performance drag, because in proper investment strategies, cash should always be working.
Usually in real estate, the catch-up is where a fund manager will defer net cash flow to investors until a predetermined milestone is hit, at which point a portion of cash flow will go to the manager.
Clawback is the recovery of money, usually incentive-based payments like bonuses or other benefits, that has already been paid to an employee, and must be returned to an employer or benefactor. Clawbacks are typically used by the financial industry as an insurance policy in response to:
- Poor performance
- A drop in company profits
- Closed-end Private Equity Fund
Private equity funds are often considered “closed-end” because their capital is not listed on a public exchange. High-net-worth individuals can directly invest in and acquire equity ownership in these funds.
Closing is the last step in the completion of any deal. Negotiations were made, agreements are executed, and funds are transferred.
- Club Deal
A club deal usually refers to several private equity firms pooling their resources to make a collective acquisition. This allows private equity firms to collectively acquire expensive companies they normally could not afford, and disperse the risk among the participating firms.
Criticism of club deals includes issues regarding regulatory practices, market cornering, and conflicts of interest.
- Convertible Note
Short term debt that is eventually converted into equity in a given enterprise, be it in the form of preferred stock or partial ownership.
Most people who are not familiar with private equity and investing will probably be relieved to learn that crowdfunding means the same in private equity as it does to the rest of the public.
It is the use of small contributions of capital from a large number of individuals to finance a project or venture. Most people are probably familiar with the concept of crowdfunding thanks to the success of platforms like Kickstarter, GoFundMe, Indiegogo, or Patreon.
- Data Room
Data rooms are where the privileged data of an organization is stored, be it sensitive or otherwise.
Discounted cash flow is how you determine the value of an investment based on the cash flow it might generate in the future.
- Deal Flow
Used by finance experts to describe the rate at which proposals and pitches are being sent and received within a given organization. Deal flow is a key part of private equity, which is why SourceScrub offers data driven solutions to enhance deal flow strategy. Deal sourcing, conference intelligence, and private company information are a few of the resources to keep the deal flow strong by finding the best investment opportunities for companies.
- Denominator Effect
When an asset’s value declines, other assets are usually sold to rebalance a portfolio, known as the “denominator effect.” Some are hard to sell in the short-to-medium term, however, so the denominator effect does not always apply.
Also known as stock or equity dilution, is when a company issues new stock, reducing existing stockholders’ ownership percentage of the company. Dilution is one way a company can raise additional funds, though it often depresses stock prices.
- Direct Investment
Also called a foreign direct investment (FDI), is an injection of capital in exchange for equity interest in the company without purchasing regular shares, with the goal of gaining controlling interest. There are three general types of direct investment:
- Vertical direct investment - when the investor adds foreign activities to an existing business.
- Horizontal direct investment - The most common form of direct investment, when a business already existing in one country establishes the same business operations in a foreign country.
- Conglomerate direct investment- when an existing company in one country adds an unrelated business operation in a foreign country.
- Equity Partnership Structures
Structures that are built around a partner receiving percentage interest in relation to retained earnings.
- Investment Period
This is the period, usually of around a year, in which a private equity fund can accept new investors. During this time, investors make agreements to contribute to the fund in exchange for an equity interest in the fund.
- PIC Multiple
Stands for paid-in capital multiple, which is a calculation that shows the ratio of committed capital that has actually been drawn upon.
- Preferred Return
A method of profit distribution where profits are distributed to one class of equity before another until a certain level of return on the investment is reached.
- Venture Capital
Capital that is provided by certain investment firms to startups, early-stage companies, and emergent companies. Usually this funding is granted to companies that look to have growth potential.
- Vintage Year
This refers to the milestone year in which the first amount of venture capital was granted to a company.
Another term that most people are probably familiar with for tax and accounting purposes. Write-offs reduce the value of an asset while also debiting a liabilities account. It’s a way to account for losses when reporting expenses and revenues.
- Zombie company
Also referred to as the “living dead,” a zombie company is that which earns just enough money to operate, has no excess capital to invest, or that can only pay the interest on a loan, not the principal. Like the name implies, these companies are on life support