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Carried interest, usually called "carry", is the share of investment profits that a private equity firm keeps after its investors have been paid back. In a typical PE fund, the Limited Partners (the investors) put up the capital. The General Partner (the PE firm) runs the investments. When
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A continuation fund is a new private equity fund that a PE firm raises specifically to buy one or more portfolio companies from an older fund it already manages. The old fund gets to exit. The companies move into the new fund. The PE firm keeps managing them for another
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EBITDA add-backs are adjustments a company makes to its reported earnings to produce a higher "adjusted EBITDA" figure. The logic is that certain expenses in reported results are one-time, non-recurring, or non-operational, and so should be added back to arrive at the "real" earnings power of
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Buy-and-build, also called roll-up, is a private equity strategy where a firm buys a platform company in a fragmented industry and then acquires smaller competitors and adds them to the platform. Over 3-7 years, the combined group gets bigger and, in theory, more valuable per unit of earnings. Multiple arbitrage
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An earn-out is a deal structure where part of the purchase price for a company is deferred and paid later, contingent on the acquired company hitting agreed performance targets. Instead of paying the seller 100% of the price at closing, the buyer pays, say, 80% upfront and 20% in year
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NAV lending, or NAV financing, is when a private equity fund borrows money using its portfolio of investments as collateral. Instead of the fund's individual portfolio companies taking on debt (the traditional way PE uses leverage), the fund itself takes on debt at the fund level, secured by
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A covenant-lite loan, often shortened to "cov-lite", is a leveraged loan with fewer of the protective clauses that lenders traditionally used to monitor borrower performance and intervene early if things went wrong. Traditional leveraged loans included "maintenance covenants" that required borrowers to periodically meet specific financial
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A tax receivable agreement, or TRA, is a contractual arrangement where a company agrees to share future tax savings with pre-IPO shareholders (often the private equity sponsor and the pre-IPO founders or managers). When a PE-backed company does an IPO using an "Up-C" structure, the IPO creates future
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"Two and twenty" is shorthand for the fee structure most private equity and hedge funds use to compensate the General Partner: a 2% annual management fee charged on committed capital, plus 20% of profits after a hurdle rate has been met. The 2% pays the firm's
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A subscription line facility is a short-term loan to a private equity fund, secured by the fund's LP commitments. Instead of calling capital from LPs immediately when the fund wants to do a deal, the fund borrows from a bank, does the deal, and then either repays the
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Private equity works by raising money from institutional investors, using that money (plus a lot of borrowed debt) to buy mature private companies, improving those companies over 4-7 years, and then selling them for a higher price. The detailed mechanics involve fund structures, capital calls, portfolio operating plans, leveraged buyouts,
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Private equity is one of the most misunderstood industries in finance. Ask ten people what it is and you will get ten different answers: "the guys who bought Toys R Us", "the investors who own my dentist now", "some kind of hedge fund", "