Private equity glossary

A plain-English glossary of private equity terminology, with deeper explainers on the terms that warrant them. If a term has its own NVPE piece, the link goes through to it.

A

Adjusted EBITDA. Reported EBITDA modified by adding back one-time, non-recurring, or non-cash items the seller argues understate true earnings power. The basis on which most PE deals are priced. See EBITDA add-backs.

American-style carry. Carry calculated deal-by-deal as exits happen, with a clawback mechanism at fund-end if early carry was overpaid.

Asset-stripping. Selling off a portfolio company's saleable assets for cash extraction. Most common form: sale-leasebacks. See sale-leaseback.

B

Bad leaver clause. Partnership-agreement language that strips an exiting employee's vested carry if they leave for cause or to a competitor. See carried interest.

Bolt-on acquisition. A smaller acquisition by an existing PE-owned platform company. The unit of execution in a buy-and-build strategy.

Buyout. PE acquisition of a controlling stake in an operating business, financed with equity from the PE fund plus debt secured against the target's cash flow.

Buy-and-build. A PE strategy of acquiring a "platform" company in a fragmented industry then layering on bolt-on acquisitions. See buy-and-build and multiple arbitrage.

C

Capital call. A formal request from the GP to LPs to wire previously-committed capital into the fund.

Capital commitment. The total dollar amount an LP has pledged to a fund over its life.

Carried interest (carry). The GP's share of fund profits above the hurdle, typically 20%. See carried interest.

Carry vesting. The schedule on which a PE professional's allocated carry points become non-forfeitable, typically over 5 years. See private equity compensation.

Catch-up. The waterfall mechanic after the hurdle is paid: the GP receives 100% of distributions until they have caught up to their full carry % on cumulative profits.

Clawback. A fund-end mechanism that requires the GP to return previously-paid carry if the fund did not generate enough profit to justify it.

Co-investment. Direct investment by an LP alongside the GP into a specific portfolio company, typically at reduced or zero fees.

Continuation fund. A new vehicle a GP forms to acquire one or more assets out of an aging fund. See continuation funds.

Covenant. A clause in a debt agreement that requires the borrower to maintain specific financial ratios. Cov-lite loans have weaker maintenance covenants.

D

Direct investment. An LP investing directly in a portfolio company. Used by sovereign wealth funds, large pensions, and family offices to reduce fee drag.

Distributions to paid-in (DPI). Cash returned to LPs divided by cash they have actually called in. The single most reliable LP metric because it's realised, not unrealised.

Dividend recapitalisation (recap). A PE-owned portfolio company taking on additional debt and using the proceeds to pay a special dividend to its sponsor.

Dry powder. Committed but uninvested capital held by PE funds. A leading indicator of future deal volume and pricing pressure.

E

Earn-out. A portion of acquisition consideration paid to the seller only if the acquired business hits agreed performance milestones over the next 1-3 years. See earn-outs.

EBITDA. Earnings Before Interest, Taxes, Depreciation, and Amortisation. The headline cash-flow proxy used to value PE deals.

EBITDA add-backs. Modifications a seller proposes to reported EBITDA to reflect a "normalised" earnings figure. See EBITDA add-backs.

European-style carry. Carry calculated on the fund as a whole — the GP earns no carry until all LP capital plus the hurdle has been returned across the entire fund.

Exit multiple. The valuation multiple (typically EV/EBITDA) at which a PE-owned portfolio company is sold.

F

Fund of funds (FoF). A vehicle that invests LP capital across multiple PE funds rather than directly into deals. Adds an extra fee layer.

Fund life. The contractual life of a PE fund from final close to wind-down, typically 10 years with optional 1-2 year extensions.

G

General Partner (GP). The PE firm itself; the entity that manages the fund, makes investment decisions, and earns carry.

Good leaver clause. Partnership language that preserves vested carry when an employee leaves for retirement, death, disability, or mutual departure. See carried interest.

GP commitment. The PE firm's own capital invested in its own fund, typically 1-5% of committed capital.

GP-led secondary. A secondary transaction initiated by the GP rather than an exiting LP, most commonly a continuation fund. See continuation funds.

H

Hold period. The time a PE fund owns a portfolio company between entry and exit. Average has crept from 4-5 years (pre-2008) to 6-7 years (now).

Hurdle rate. The annual preferred return LPs receive on their capital before the GP earns any carry. Standard PE is 8% compounded.

I

IRR (Internal Rate of Return). The annualised return of a fund or deal that makes the present value of cash flows equal zero. Gameable through capital deployment timing via subscription lines.

Investment Committee (IC). The internal PE-firm body that approves new deals, typically composed of senior partners.

J

J-curve. The shape of a PE fund's net IRR over time: negative in early years then turning positive as exits begin. Typically takes 3-5 years to cross zero net IRR.

L

LBO (Leveraged Buyout). A buyout transaction where a significant portion of the purchase price is financed with debt secured against the target's cash flows. See the LBO model.

Limited Partner (LP). An investor that provides capital to a PE fund — pension funds, endowments, sovereign wealth funds, insurance companies, family offices.

Limited Partnership Agreement (LPA). The contract between LPs and the GP governing the fund.

M

Management fee. Annual fee charged by the GP to LPs, typically 2% of committed capital. See two and twenty.

Mezzanine debt. Subordinated debt that sits between senior debt and equity in the capital structure.

MOIC (Multiple of Invested Capital). Total value (realised + unrealised) divided by invested capital, expressed as a multiple. A target gross MOIC of 2.0x means the fund aims to double LP capital before fees.

Multiple arbitrage. The PE strategy of acquiring smaller companies at lower multiples and selling the combined platform at a higher multiple. The economic logic underlying buy-and-build.

N

NAV (Net Asset Value). The fair-value sum of a fund's portfolio holdings at a given point in time.

NAV facility / NAV lending. A loan secured against the net asset value of a PE fund's portfolio. See NAV lending.

P

Paid-in capital. Capital that LPs have actually wired to the fund. Denominator for DPI and TVPI calculations.

PIK (payment-in-kind). Interest paid by the borrower in additional debt rather than cash.

Platform company. The first acquisition in a buy-and-build strategy.

Portfolio company. A company owned by a PE fund. The unit of investment.

Private equity vs venture capital. Both invest LP capital in private companies. PE buys mature businesses with debt; VC funds growth-stage companies with equity. See private equity vs venture capital.

Q

Quality of Earnings (QoE). A diligence report by a third-party accounting firm that scrutinises the seller's reported EBITDA and proposes adjustments.

R

Roll-up. Synonym for buy-and-build.

S

Sale-leaseback. A transaction where a PE-owned company sells real estate it owns and immediately signs a long-term lease back. See sale-leaseback.

Secondary. Sale of an existing LP interest in a fund (LP-led secondary) or sale of a portfolio company between funds via a continuation vehicle (GP-led secondary).

Sponsor. Synonym for the GP / PE firm in the context of a specific deal.

Subscription line of credit (sub-line). A short-term revolving credit facility secured against LPs' uncalled commitments. Inflates reported IRR by deferring cash deployment. See subscription lines.

T

Tax Receivable Agreement (TRA). A contractual mechanism in PE-backed IPOs under which the post-IPO public company pays 85% of the value of certain tax savings to pre-IPO owners over 15+ years. See tax receivable agreements.

TVPI (Total Value to Paid-In). DPI plus the unrealised value of remaining portfolio holdings, divided by paid-in capital.

Two and twenty. The standard PE fee structure: 2% annual management fee + 20% carry above an 8% hurdle. See two and twenty.

U

Unitranche. A single-tranche debt structure that combines what would otherwise be senior + mezzanine into one facility with a blended rate.

Up-C structure. An IPO structure where the operating business sits in a partnership and the public company is a holding company that owns units in the partnership. The structure that enables tax receivable agreements.

V

Vintage year. The year of a fund's first close, used to compare funds against peers raised in the same market environment.

W

Waterfall. The sequence of distributions in a PE fund: 1) return of LP capital, 2) preferred return, 3) GP catch-up, 4) carried interest split.

Z

Zombie fund. A PE fund past its expected harvest period that holds undistributed assets and continues to charge management fees despite being unable to raise a successor fund. See zombie funds.