Average IRR — The
arithmetic mean of the internal rates of return.
Balanced — A venture
fund investment strategy which includes investment in portfolio
companies at a variety of stages of development (Seed, Early
Stage, Later Stage, Leveraged Buyouts).
Buyout — The purchase of
a controlling interest in a company with the use of debt and
equity by an outside investor (leveraged buyout) or by the company’s
management (management buyout).
Capital Account — The
value of a partner's ownership interest in a partnership as determined
by the general partner.
Capital Call I Drawdown I Takedown —
A request by the general partner for money (capital)
from the limited partners. The general partner will make several
requests for money, generally over a 5-7 year period, until the
limited partners' commitments are fulfilled.
Capital Weighted Average IRR — The
average IRR weighted by fund size.
Carried Interest — The performance incentive
for the general partner. Typically, the general partner receives
20% of the capital gains generated by the investments in the
Catch-up — A feature in the limited partnership
agreement that allows the general partner to receive a majority
of the distributions until the agreed upon split of profits has
been achieved. Generally, this situation arises when the
general partner makes all distributions to the partners according
to their Contribution percentage, plus a specified rate of return
(Hurdle Rate or Preferred Return, see below), before the general
partner participates in any distributions. Once this point
has been reached, the general partner receives a priority in
distributions until it has obtained its share of the Preferred
Return. Then, all profits are split according to the Carried
Clawback — The clawback
gives limited partners the right to reclaim a portion of distributions
to a general partner, if at the end of the partnership’s life, the general
partner has received more than its agreed upon share of the profits
from the Carried Interest. This situation can arise if
the partnership has a large success early in the partnership’s
life and distributes a portion of the profits to the general
partner. For simplicity, if the rest of the investments
in the partnership turn out to be worthless, then the limited
partners have a right force the general partner to return its
previous distribution to the limited partners. There may
also be a general partner clawback, if for example there was
a lawsuit pertaining to a former company in the partnership. If
this company was sold, with proceeds distributed to the limited
partners, and a judgment was found in favor of the plaintiff,
then the limited partners would have to return part or all of
Commitment — A limited
partner's obligation to provide a certain amount of capital
to a partnership.
Committed Capital — Generally, the aggregate
amount of capital committed by all partners.
Contribution — The
amount(s) of capital that has (have) been called by the general
partner over the life of the partnership for the limited partners
to fulfill their Commitment obligation.
Direct Investment — An investment in the securities
of a portfolio company.
Discount/Premium — The difference between
the net asset value of a Limited Partner’s Interest, reported
by the General Partner, and the amount a buyer is willing to
pay for it.
Distribution — Cash or a company's stock disbursed
to the limited partners of a venture fund.
Due Diligence — The investigation and evaluation
of a management team's characteristics, investment philosophy,
and terms and conditions prior to committing capital to the fund.
Early Stage — A stage
in a company’s
development where its product or service is in development and
management is in various stages of initial marketing, manufacturing
and sales activities.
Exiting Strategy —
A partnership's intended method for liquidating its holdings,
while achieving the maximum return possible.
Expansion Stage — A stage in a company’s
development where its product or service is commercially available
and generating meaningful revenue for the company. The
challenge at this stage is building and managing growth.
Fund — A verb meaning
to invest capital into either a partnership or a company; or
a noun meaning another name for a partnership.
Fund-of-Funds — A
partnership formed to invest in other funds/partnerships. It
provides investors with a diversified portfolio of private
equity partnerships and streamlines the administrative and
Fund Age — The age of a fund (in years) from
its first takedown to the time an IRR is calculated.
Fund Focus (Investment Stage) — The
indicated area of specialization of a venture capital fund
usually expressed as Balanced, Seed and Early Stage, Later
Stage or Leveraged Buyout (LBO).
Fund Size - The total amount of capital committed
by the limited and general partners of a fund.
Hurdle Rate/Preferred Return — A
agreed upon rate of return that the limited partners must obtain
before the general partner can participate in the profits of
In-kind Distribution — The
distribution of a portfolio company's stock directly to a limited
partner. In most cases the stock is public, but in some cases
it may not be.
IRR (Internal Rate of Return) — The
discount rate that equates the net present value (NPV) of all
investment's cash inflows with its cash outflows.
Interest — See Limited Partnership Interest
J-Curve — A
graphic representation of the return profile of a typical private
equity partnership measured in terms of multiple of cost. Since
the valuations of private companies remain unchanged for a
long period of time, perhaps one to two years, the investment
return in the early life of a partnership is usually negative. The
reason for this is that the main variable affecting the return
during this period is operating expenses, which are not offset
by valuation increases. After
a few years the investments in the portfolio begin to mature,
valuations begin to rise, and the partnership turns profitable.
Later Stage — A fund
investment strategy involving financing for the expansion of
a company that is producing, shipping and increasing its sales
Limited Partnership— A legal entity composed of a general partner and a number of
limited partners. The
general partner makes and manages the investments and is liable
for the actions of the partnership, while the limited partners
are generally limited to the amount of their investment. The
general partner receives a management fee and a percentage of
profits (see Carried interest), while the limited partners receive
ordinary income and capital gains.
Limited Partnership Interest — Similar
to a share of stock, this represents an investor's (limited partner’s)
ownership position in a partnership.
Liquidation — The sale of the assets of a portfolio
company to one or more acquirors when venture capital investors
receive some of the proceeds of the sale.
Lower Quartile — The point at which 75% of
all returns in a group are greater and 25% are lower.
Management Fee — Compensation for the management
of a venture fund's activities, generally paid quarterly from
the fund to the general partner or management company.
Maximum — The highest return level for a group
Median — The mid-point of a distribution, with
half of the sample less than or equal to the median, and half
of the sample greater than or equal to the median.
Mezzanine — A fund investment strategy involving
subordinated debt (the level of financing senior to equity and
below senior debt) with some equity participation under certain
Minimum — The lowest
return level for a group of funds.
Paid-in Capital — The
amount of committed capital a limited partner has actually transferred
to a venture fund. Also known as the cumulative takedown amount.
Partnership Interest — See
Limited Partnership Interest above.
Pooled IRR — A method
of calculating an aggregate IRR by summing cash flows together
to create a portfolio cashflow and calculate IRR on portfolio
cashflow. This is different from Capital Weighted IRR in that
the Pooled IRR is based on actual capital invested by the limited
partners as opposed to the amount Committed by them.
Portfolio Company — One
of many companies in a partnership in which the general partner
has invested the partnership's capital.
Preferred Return — See
Hurdle Rate above.
Premium/Discount — See
Primary — The
investment in a newly formed partnership.
Quartile — Segment
of a sample representing a sequential quarter (25%) of the group.
(First 10 out of 40 funds — first quartile, etc.)
Right of First Refusal — A clause in
a partnership agreement that gives the limited partners, and
sometimes the general partner, the right to buy a current limited
partner’s interest before it can be sold to an outside
party. In some cases the limited partners or general partner
need only match the offer from the outside party.
Secondary — The
purchase or sale of a limited partnership interest in a partnership
that has been in existence for a number of years.
Secondary Direct — The purchase/sale
of company from a partnership. Many times this occurs towards
the end of a partnership’s life when the general partner
is trying to wind up the affairs of the partnership. In
this instance the general partner will try to sell its remaining
positions to another investor.
Seed Stage — A
development stage in which a company has not yet fully established
commercial operations, an may also involve continued research
and product development.
Takedown Schedule — The plan stated in the
offering memorandum providing for the actual transfer of funds
from the limited partners' to the general partners' control.
Upper Quartile — The point at which 25% of
all returns in a group are greater and 75% are lower
Value Ratio — The
distributions (D) received by the limited partners, plus
the current value of their capital account (CA), divided by the
amount of capital invested (CI) by the limited partner. The higher
this ratio is
above 1.0, the better the partnership is performing. Early in
the life of a
partnership, however, the Value Ratio is typically below one,
due to the “J-curve” effect. (See “J-curve” above.).
Value Ratio = (D + CA) /
Vintage Year — The year of a fund's formation
and first takedown of capital.
Write-down — A reduction in the value of an
Write-off — The write-down of a portfolio company's
holdings to a valuation of zero and the venture capital investors
receive no proceeds from their investment.
Write-up — An increase
in the value of an investment.