Absolute Return Strategies
An investment strategy with the objective of securing a stipulated level of return independently of a proscribed traditional stock or bond market index. The strategy targets an absolute return range, and not returns relative to a predetermined index. This is a common characteristic of hedge funds.
Defined by Rule 501 of Regulation D, an individual (i.e. non-corporate) "accredited investor" is a either a natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase OR a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. For the complete definition of accredited investor, see the SEC website.
The interest due on preferred stock or a bond since the last interest payment was made.
The process of gaining control, possession or ownership of a private portfolio company by an operating company or conglomerate.
Accelerated Cost Recovery System. The IRS approved method of calculating depreciation expense for tax purposes. Also known as Accelerated Depreciation.
American Depositary Receipt (ADR's). A security issued by a U.S. bank in place of the foreign shares held in trust by that bank, thereby facilitating the trading of foreign shares in U.S. markets.
The Investment Advisor Act of 1940 requires all Registered Investment Advisors to complete Form ADV and file with the SEC. The SEC collects the information for regulatory purposes, such as deciding whether to grant registration. Form ADV information about investment advisors and their business is available to the public through the SEC.
A group of external advisors to a private equity group or portfolio company. Advice provided varies from overall strategy to portfolio valuation. Less formal than a Board of Directors.
The amount of securities assigned to an investor, broker, or underwriter in an offering. An allocation can be equal to or less than the amount indicated by the investor during the subscription process depending on market demand for the securities.
A numerical value indicating excess rate of return relative to a benchmark. As it applies to hedge funds, it is a manager's "value-added" in selecting securities.
Alpha Confidence Interval (95%)
The range within which the true alpha of the manager is estimated to fall, with 95% probability.
This term describes non-traditional asset classes. They include private equity, venture capital, hedge funds and real estate. Alternative assets are generally more risky than traditional assets, but they should, in theory, generate higher returns for investors.
The alternative investment universe consists of investments outside of the traditional market investments of publicly traded debt, equity, real estate and oil & gas. It includes investments ranging from hedge funds and managed futures to venture capital, private placements, and LBO funds.
An accounting procedure that gradually reduces the book value of an intangible asset through periodic charges to income.
Alternative Minimum Tax. A tax designed to prevent wealthy investors from using tax shelters to avoid income tax. The calculation of the AMT takes into account tax preference items.
Capital raised for a private company from independently wealthy investors. This capital is generally used as seed financing.
A person who provides backing to very early-stage businesses or business concepts. Angel investors are typically entrepreneurs who have become wealthy, often in technology-related industries.
The total percent return for the year.
Contractual measures that allow investors to keep a constant share of a firm's equity in light of subsequent equity issues. These may give investors preemptive rights to purchase new stock at the offering price. [See Full Ratchet and Weighted Average]
An investment strategy that attempts to take advantage of temporary price discrepancies between securities by buying the cheaper one and selling short the more expensive one. Usually based on the use of historical relationships between instruments in different markets to predict future trends of movements in price.
Usually an outsider hired by a syndicate of angel investors to perform due diligence on investment opportunities and coordinate allotment of investment duties among members. Archangels typically have no financial commitment to the syndicate.
The percentage allocation of an investor's total portfolio in different asset classes.
A broadly defined group of securities that have similar risk and return characteristics. Examples of asset class categories include equities, fixed income, cash, etc.
Loan, typically from a commercial bank, that is backed by asset collateral, often belonging to the entrepreneurial firm or the entrepreneur.
Immediate conversion of an investor's priority shares to ordinary shares at the time of a company's underwriting before an offering of its stock on an exchange.
A simple average (arithmetic mean) of the periods with a gain. It is calculated by summing the returns for gain periods (i.e., with returns greater than or equal to zero) and dividing the total by the number of gain periods.
A simple average (arithmetic mean) of the periods with a loss. It is calculated by summing the returns for loss periods (i.e., with returns less than zero) and dividing the total by the number of loss periods.
A Simple average (arithmetic mean), which is calculated by summing the returns for each period and dividing the total by the number of periods. The simple average does not take the compounding effect of investment returns into account.
A condensed financial statement showing the nature and amount of a company's assets, liabilities, and capital on a given date.
An inability to pay debts. Chapter 11 of the bankruptcy code deals with reorganization, which allows the debtor to remain in business and negotiate for a restructuring of debt.
An offer made directly to the Board of Directors of a target company. Usually made to increase the pressure on the target with the threat that a tender offer may follow.
A standard against which risk and return investment performance can be evaluated. Widely used equity performance benchmarks are the total return of the S&P500, the Russell3000, and the MSCI EAFE Index. Different benchmarks are used for evaluating different asset classes or styles of investing.
An offering in which he investment banker agrees to distribute as much of the offering as possible, and return and unsold shares to the issuer.
A historical measure of an investment's sensitivity to market movements. By definition, the beta of the market (as measured by the benchmark) is 1.0. A beta of less than 1.0 indicates that the investment is less sensitive to the market, while a beta of more than 1.0 indicates that the investment is more sensitive to the market. Generally, the higher the correlation between the investment and the market (as measured by R-squared), the more meaningful is beta. Because beta is based on measurements of past performance, it is not an indication of what the investment's performance will be in the future.
Beta Confidence Interval (95%)
The range within which the true beta of the fund is estimated to fall, with 95% probability.
Black-Scholes option valuation model, developed by Fisher Black and Myron Scholes in 1973, is the most widely used option-pricing model to date. To determine the fair market value of an option, it takes into consideration the securities price, the exercise price, the risk free rate, the time to maturity, and the standard deviation of the underlying asset price.
Blue Sky Laws
A common term that refers to laws passed by various states to protect the public against securities fraud. The term originated when a judge ruled that a stock had as much value as a patch of blue sky.
Allowing an investor to take a seat on a firm's board of directors.
Book value of a stock is determined from a company's balance sheet by adding all current and fixed assets and then deducting all debts, other liabilities and the liquidation price of any preferred issues. The sum arrived at is divided by the number of common shares outstanding and the result is book value per common share.
Means of financing a small firm by employing highly creative ways of using and acquiring resources without raising equity from traditional sources or borrowing money from the bank.
An approach to investing that bases investment selection on fundamental analysis of specific companies, versus a top-down approach that centers on evaluation of economic trends. Bottom-up investing involves detailed company specific analysis in order to arrive at investment decisions. Emphasis is placed upon company fundamentals such as earnings, cash flows, financial ratios, P/E, etc. to determine the relative value of a stock.
A limited amount of equity or short-term debt financing typically raised within 6-18 months of an anticipated public offering or private placement meant to "bridge" a company to the next round of financing.
Burn Out / Cram Down
Extraordinary dilution, by reason of a round of financing, of a non-participating investor's percentage ownership in the issuer.
The rate at which a company expends net cash over a certain period, usually a month.
Business Development Company (BDC)
A vehicle established by Congress to allow smaller, retail investors to participate in and benefit from investing in small private businesses as well as the revitalization of larger private companies.
Business Judgment Rule
The legal principle that assumes the board of directors is acting in the best interests of the shareholders unless it can be clearly established that it is not. If the board was found to violate the business judgment rule, it would be in violation of its fiduciary duties to the shareholders.
A document that describes the entrepreneur's idea, the market problem, proposed solution, business and revenue models, marketing strategy, technology, company profile, competitive landscape, as well as financial data for coming years. The business plan opens with a brief executive summary, most probably the most important element of the document due to the time constraints of venture capital funds and angels.
The right to buy a security at a given price (or range) within a specific time period.
The average annual return for a period of time divided by the maximum drawdown during that period.
Capital (or Assets) Under Management
The amount of capital available to a fund management team for venture investments.
Also known as a draw down - When a venture capital firm has decided where it would like to invest, it will approach its investors in order to "draw down" the money. The money will already have been pledged to the fund but this is the actual act of transferring the money so that it reaches the investment target.
The difference between an asset's purchase price and selling price, when the selling price is greater. Long-term capital gains (on assets held for a year or longer) are taxed at a lower rate than ordinary income.
Also called a "Cap Table", this is a table showing the total amount of the various securities issued by a firm. This typically includes the amount of investment obtained from each source and the securities distributed -- e.g. common and preferred shares, options, warrants, etc. -- and respective capitalization ratios.
To record an outlay as an asset (as opposed to an Expense), which is subject to depreciation or amortization.
A venture capital firm owned by a larger financial institution, such as a bank.
The portion of any gains realized by the fund to which the fund managers are entitled, generally without having to contribute capital to the fund. Carried interest payments are customary in the venture capital industry, in order to create a significant economic incentive for venture capital fund managers to achieve capital gains.
The amount of cash available to a company at a given point in time.
A reduction in the likelihood that one or more of the firm's claimants will be fully repaid, including time value of money considerations.
This is a common term of the private equity partnership agreement. Once the general partner provides its limited partners with their preferred return, if any, it then typically enters a catch-up period in which it receives the majority or all of the profits until the agreed upon profit-split, as determined by the carried interest, is reached.
The part of the Bankruptcy Code that provides for reorganization of a bankrupt company's assets.
The part of the Bankruptcy Code that provides for liquidation of a company's assets.
A barrier against information flows between different divisions or operating groups within banks and securities firms. Examples include a policy barrier between the trust department from making investment decisions based on any substantive inside information that may come into the possession of other bank departments. The term also refers to barriers against information flows between corporate finance and equity research and trading operations.
A clawback obligation represents the general partner's promise that, over the life of the fund, the managers will not receive a greater share of the fund's distributions than they bargained for. Generally, this means that the general partner may not keep distributions representing more than a specified percentage (e.g., 20%) of the fund's cumulative profits, if any. When triggered, the clawback will require that the general partner return to the fund's limited partners an amount equal to what is determined to be "excess" distributions.
A type of fund that has a fixed number of shares outstanding, which are offered during an initial subscription period, similar to an initial public offering. After the subscription period is closed, the shares are traded on an exchange between investors, like a regular stock. The market price of a closed-end fund fluctuates in response to investor demand as well as changes in the values of its holdings or its Net Asset Value. Unlike open-end mutual funds, closed-end funds do not stand ready to issue and redeem shares on a continuous basis.
An investment event occurring after the required legal documents are implemented between the investor and a company and after the capital is transferred in exchange for company ownership or debt obligation.
The syndication of a private equity financing round or an investment by an individuals (usually general partners) alongside a private equity fund in a financing round.
Agreed upon adjustments in the number of shares offered in a stock-for-stock exchange to account for price fluctuations before the completion of the deal.
Collateralized Debt Obligations (CDO/CBO)
An asset-backed type of securitization whereby the underlying portfolio is comprised of securities, Collateralized Bond Obligation (CBO), or loans, Collateralized Loan Obligation (CLO), or a mixture of both. CDOs fall into two main categories - 1) Balance sheet CDO -- usually the seller is a financial institution selling to restructure a debt portfolio, possibly to free up loaning capacity or reduce their regulatory capital. 2) Arbitrage CDO -- here the goal is to purchase a portfolio which will act as collateral for a securitization with tranches for the various risk levels required by investors.
Collateralized Mortgage Obligation (CMO)
A pass-through security that aggregates a pool of mortgage-backed debt obligations. Homeowners' principal and interest payments pass from the originating bank or savings and loan through a government agency or investment bank, to investors, net of a loan-servicing fee payable to the originator.
A pool of capital made up of several investors in a single or multi-manager strategy. The opposite of a separate, managed account for a single investor. Usually structured to allow for lower minimum investments than a separate account.
The total dollar amount of capital pledged to a private equity fund.
Committed funds or raised funds
Capital committed by investors. Cash to the maximum of these commitments may be requested or drawn down by the private equity managers usually on a deal-by-deal basis. This amount is different from invested funds for three reasons. Firstly, most partnerships will initially invest only between 80% and 95% of committed funds (possibly even less). Second, it may be necessary in early years to deduct the annual management fee that is used to cover the cost of operation of a fund. Third, payback to investors usually begins before the final draw down of commitments has taken place. To the extent that capital invested does not equal capital committed, limited partners will have their private equity returns diluted by the much lower cash returns earned on the uninvested portion. Avoiding this situation is the main reason for the Partners Group over-commitment model, which aims to keep Partners Group products as close 100% invested as possible.
Commodity Futures Trading Commission (CFTC)
A regulatory agency that monitors commodity pool operators and commodity trading advisors.
A unit of ownership of a corporation. In the case of a public company, the stock is traded between investors on various exchanges. Owners of common stock are typically entitled to vote on the selection of directors and other important events and in some cases receive dividends on their holdings. Investors who purchase common stock hope that the stock price will increase so the value of their investment will appreciate. Common stock offers no performance guarantees. Additionally, in the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.
The redemption of private of restricted holdings by the portfolio company itself. In essence the company is buying out the VC's interest.
Compound (Geometric) Average Return
The geometric mean is the monthly average that assumes we have an equivalent rate of return for each month to arrive at the same compound growth rate as we do using the actual month-to-month return data. The quarterly and annual compound returns are calculated using the monthly compound return solution.
Also called a leveraged rollup, this is an investment strategy in which a leveraged buyout (LBO) firm acquires a series of companies in the same or complementary fields, with the goal of becoming a dominant regional or nationwide player in that industry. In some cases, a holding company will be created to acquire the new companies. In other cases, an initial acquisition may serve as the platform through which the other acquisitions will be made.
The number of shares of stock into which a convertible security may be converted. The conversion ration equals the par value of the convertible security divided by the conversion price.
Convertible Bond Arbitrage
An investment strategy whereby one is simultaneously long the undervalued convertible securities (bond or preferred stock) and short the overvalued underlying equities of the same issuer, thereby "working the spread" between the two types of securities. This is considered a relatively conservative, market neutral strategy (low or no correlation to the market), with a medium term investment period.
A bond, debenture or preferred stock that is exchangeable for another type of security (usually common stock) at a pre-stated price. Convertibles are appropriate for investors who want higher income, or liquidation preference protection, than is available from common stock, together with greater appreciation potential than regular bonds offer. (See Common Stock, Dilution, and Preferred Stock).
Convexity refers to the shape (i.e., degree of curvature) of the price/yield relationship in a fixed income instrument.
The document prepared when a corporation is formed. The Charter sets forth the objectives and goals of the corporation, as well as a complete statement of what the corporation can and cannot do while pursuing these goals.
A document stating that the corporation's board of directors has authorized a particular individual to act on behalf of the corporation.
Venture capital provided by [in-house investment funds of] large corporations to further their own strategic interests.
A legal, taxable entity chartered by a state or the federal government. Ownership of a corporation is held by the stockholders.
A measurement of relationship between two variables. The correlation coefficient (r) shows if there is any correlation between an asset and the market. 1.0 is perfect correlation, 0.0 is absolutely no correlation, and -1.0 is a perfect negative correlation. Studies indicate that a correlation coefficient below 0.3 has no correlation to the market.
A protective clause in an agreement.
Credit Default Swaps
are typically used to obtain capital relief. In this structure, the mortgage lender enters into a credit default swap agreement with an intermediary bank that guarantees to repay foreclosure-related losses on the lender's mortgage portfolio. The intermediary bank then enters into a back-to-back swap agreement with a special purpose vehicle. (Alternatively, the mortgage lender can sell notes to an intermediary bank, which then enters into a swap agreement with the special purpose vehicle.)
Dividends that accrue at a fixed rate until paid are "Cumulative Dividends" which are payments to shareholders made with respect to an investor's Preferred Stock. Generally, holders of Preferred Shares are contractually entitled to receive dividends prior to holders of Common Stock. Dividends can accumulate at a fixed rate (for example 8%) or simply be payable as and when determined by a company's Board of Directors in such amount as determined by the board. Because venture backed companies typically need to conserve cash, the use of Cumulative Dividends is customary with the result that the Liquidation Preference increases by an amount equal to the Cumulative Dividends. Cumulative Dividends are often waived if the Preferred Stock converts to Common Stock prior to an IPO but may be included in the aggregate value of Preferred Stock applied to the Conversion Ratio for other purposes. Dividends that are not cumulative are generally called "when, as and if declared dividends."
Cumulative Dollar Profit
The total profit/loss in dollars (in millions) from inception to the end of the year.
Cumulative Preferred Stock
A stock having a provision that if one or more dividend payments are omitted, the omitted dividends (arrearage) must be paid before dividends may be paid on the company's common stock.
Cumulative Voting Rights
When shareholders have the right to pool their votes to concentrate them on an election of one or more directors rather than apply their votes to the election of all directors. For example, if the company has 12 openings to the Board of Directors, in statutory voting, a shareholder with 10 shares casts 10 votes for each opening (10x12= 120 votes). Under the cumulative voting method however, the shareholder may opt to cast all 120 votes for one nominee (or any other distribution he might choose). Compare Statutory Voting.
A financial institution which holds stocks, bonds and other securities for guaranteed safekeeping. Related services include the collection of income on custodied securities, the settlement of transactions, the investment of cash overnight and the provision of accounting reports. Additional services may include performance evaluation and analysis, on-line reporting, global custody and securities lending.
The measure of the number of potential investments that a fund reviews in any given period.
A letter sent by the SEC to the issuer of a new issue regarding omissions of material fact in the registration statement.
Contemplate that the company must initiate and pursue the registration of a public offering including, although not necessarily limited to, the shares proffered by the requesting shareholder(s).
An expense recorded to reduce the value of a long-term tangible asset. Since it is a non-cash expense, it increases free cash flow while decreasing the amount of a company's reported earnings.
Financial instruments that "derive" value from related securities or combination of securities. For example an equity option derives its value from the underlying equity volatility. A convertible bond derives its value from the underlying or "related" equity value and the fixed income characteristics of the bond.
Mainly applies to convertible securities. Standard provision whereby the conversion ratio is changed accordingly in the case of a stock dividend or extraordinary distribution to avoid dilution of a convertible bondholder's potential equity position. Adjustment usually requires a split or stock dividend in excess of 5% or issuance of stock below book value. Share Purchase Agreements also typically contain anti-dilution provisions to protect investors in the event that a future round of financing occurs at a valuation that is below the valuation of the current round.
A reduction in the percentage ownership of a given shareholder in a company caused by the issuance of new shares.
Person elected by shareholders to serve on the board of directors. The directors appoint the president, vice president and all other operating officers, and decide when dividends should be paid (among other matters).
The investments by funds into their portfolio companies.
A booklet outlining the risk factors associated with an investment.
The securities of companies undergoing corporate restructuring, usually bankruptcy or reorganization. Investors seek to buy company securities at a low price and resell when/if the company comes out of bankruptcy and securities appreciate. Securities can range from low risk senior secured debt to high-risk common stock.
The number of gaining or losing rolling periods divided by the total number of rolling periods. Percentages in the "Gain" and "Loss" columns will total 100%.
Disbursement of realized cash or stock to a venture capital fund's limited partners upon termination of the fund.
The process of spreading investments among various different types of securities and various companies in different fields.
The payments designated by the Board of Directors to be distributed pro-rata among the shares outstanding. On preferred shares, it is generally a fixed amount. On common shares, the dividend varies with the fortune of the company and the amount of cash on hand and may be omitted if business is poor or if the Directors determine to withhold earnings to invest in capital expenditures or research and development.
Domestic (Onshore) Fund
An unregistered investment entity that is formed in the U.S. and open to U.S. investors. The General Partner typically acts as investment advisor and manages the fund in return for an advisory and performance fee. The fund is typically structured as a limited liability corporation or a limited partnership.
Down Percent (%)
The Down Percentage Ratio is a measure of the number of periods that the investment outperformed the benchmark when the benchmark was down, divided by the number of periods that the benchmark was down. A larger ratio indicates better risk adjusted performance.
Issuance of shares at a later date and a lower price than previous investment rounds.
A majority shareholders' right, obligating shareholders whose shares are bound into the shareholders' agreement to sell their shares into an offer the majority wishes to execute.
a drawdown is the cumulative loss from peek to trough for any given period. A Drawdown is in effect from the time an equity retrenchment begins until ground has been recovered.
A sequence of actions taken by an investor to ensure the validity of a particular manager or strategy. Usually takes the form of several standard questions and site visits to investigate the quality, reputation, background and adherence to stated manager style and strategy discipline.
A process undertaken by potential investors -- individuals or institutions -- to analyze and assess the desirability, value, and potential of an investment opportunity.
A measure of the sensitivity of a bond's price to changes in interest rates.
The MSCI EAFE Index is an unmanaged index of over 1,000 foreign common stock prices and includes the reinvestment of dividends. It tracks 20 developed stock markets outside of North America.
A state of a company that typically has completed its seed stage and has a founding or core senior management team, has proven its concept or completed its beta test, has minimal revenues, and no positive earnings or cash flows.
"Earnings Before Interest, Taxes, Depreciation and Amortization" - A measure of cash flow calculated as Revenue - Expenses (excluding tax, interest, depreciation and amortization). EBITDA looks at the cash flow of a company. By not including interest, taxes, depreciation and amortization, we can clearly see the amount of money a company brings in. This is especially useful when one company is considering a takeover of another because the EBITDA would cover any loan payments needed to finance the takeover.
Economies of Scale
Economic principle that as the volume of production increases, the cost of producing each unit decreases.
Investment in the securities of companies located in developing countries, e.g., Russia, India, etc. The definition of an "emerging market" is the market in any country with per capita GNP of less than US$ 7620 in l990 (World Bank). This is primarily a long strategy, as many countries do not permit shorting. The holding period is usually short to medium term. Because these markets are less mature with high, volatile growth and inflation, expected volatility can be very high.
Employee Stock Option Plan (ESOP)
A plan established by a company whereby a certain number of shares is reserved for purchase and issuance to key employees. Such shares usually vest over a certain period of time to serve as an incentive for employees to build long term value for the company.
Employee Stock Ownership Plan
A trust fund established by a company to purchase stock on behalf of employees.
Option for private equity investors to purchase shares at a discount. Typically associated with mezzanine financings where a small number of shares or warrants are added to what is primarily a debt financing.
Equity Market Neutral
An investment strategy where an equal dollar amount of securities are held both long and short. The portfolio thereby theoretically maintains a neutral exposure to the market. If longs selected are undervalued and shorts overvalued, there should be net benefit. There are many variations on this basic structure - dollar neutral or equal dollars long and short; sector neutral with balanced sector weightings on both sides, and beta neutral.
ERISA Significant Participation Test
A test that is satisfied if the General Partner determines in its reasonable discretion that persons that are "benefit plan investors" within the meaning of Section (f)(2) of the Final Regulation constitute or are expected to constitute at least 25 percent in interest of the Limited Partners. Note that the test is 25% of the interests of all the limited partners, which means 20% (+/-) in the partnership as a whole, taking into account the general partner's interest.
ERISA shall mean the United States Employee Retirement Income Security Act of 1974, as amended, including the regulations promulgated thereunder.
An investment strategy that seeks to profit from special situations or opportunities to capitalize on price fluctuations or imbalances. Various styles or strategies may be simultaneously employed or the strategy may be changed as deemed appropriate, e.g., there is no commitment to any particular style or asset class.
The price at which an option or warrant can be exercised.
A fund's intended method for liquidating its holdings while achieving the maximum possible return. These strategies depend on the exit climates including market conditions and industry trends. Exit strategies can include selling or distributing the portfolio company's shares after an initial public offering (IPO), a sale of the portfolio company or a recapitalization.
The conditions that influence the viability and attractiveness of various exit strategies.
Exits (AKA divestments or realizations)
The means by which a private equity firm realizes a return on its investment. Private equity investors generally receive their principal returns via a capital gain on the sale or flotation of investments. Exit methods include a trade sale (most common), flotation on a stock exchange (common), a share repurchase by the company or its management or a refinancing of the business (least common). A Secondary purchase of the LP interest by another private equity firm are becoming an increasingly common phenomenon.
A person who helps to arrange a transaction.
Fixed Income Arbitrage
An arbitrage that takes advantage of mis-pricing and distortions in value between two securities. Arbitrage profit opportunities often exist because different participants have different objectives, constraints, market outlook and skill level. Yield spreads between fixed income securities often provide arbitrage opportunities as market factors influence these relationships and produce value distortions. Various fixed income instruments such as treasury bonds, corporate bonds, mortgage backed securities, derivatives etc. are utilized in an arbitrage situation.
The act of buying shares in an IPO and selling them immediately for a profit. Brokerage firms underwriting new stock issues tend to discourage flipping, and will often try to allocate shares to investors who intend to hold on to the shares for some time. However, the temptation to flip a new issue once it has risen in price sharply is too irresistible for many investors who have been allocated shares in a hot issue.
When a firm's shares start trading on a formal stock exchange, such as the NASDAQ or the NYSE. This is probably the most profitable exit route for entrepreneurs and their financial backers.
Companies often require several rounds of funding. If a private equity firm has invested in a particular company in the past, and then provides additional funding at a later stage, this is known as 'follow-on funding'.
This is the annual report that most reporting companies file with the Commission. It provides a comprehensive overview of the registrant's business. The report must be filed within 90 days after the end of the company's fiscal year.
This is the annual report filed by reporting "small business issuers." It provides a comprehensive overview of the company's business, although its requirements call for slightly less detailed information than required by Form 10-K. The report must be filed within 90 days after the end of the company's fiscal year.
The form can be used to register securities for which no other form is authorized or prescribed, except securities of foreign governments or political sub-divisions thereof.
This is a simplified optional registration form that may be used by companies that have been required to report under the '34 Act for a minimum of three years and have timely filed all required reports during the 12 calendar months and any portion of the month immediately preceding the filing of the registration statement. Unlike Form S-1, it permits incorporation by reference from the company's annual report to stockholders (or annual report on Form 10-K) and periodic reports. Delivery of these incorporated documents as well as the prospectus to investors may be required.
This form may be used by "small business issuers" to register securities to be sold for cash. This form requires less detailed information about the issuer's business than Form S-1.
Shares owned by a company's founders upon its establishment.
Free cash flow
The cash flow of a company available to service the capital structure of the firm. Typically measured as operating cash flow less capital expenditures and tax obligations.
Fully Diluted Earnings Per Share
Earnings per share expressed as if all outstanding convertible securities and warrants have been exercised.
Fully Diluted Outstanding Shares
The number of shares representing total company ownership, including common shares and current conversion or exercised value of the preferred shares, options, warrants, and other convertible securities.
The age of a fund (in years) from its first takedown to the time an IRR is calculated.
Fund of Funds
A fund that invests in a portfolio of hedge funds. The fund's portfolio may utilize a variety of investment styles, thus creating a diverse vehicle for investors. The benefits of a fund of funds include professional management and monitoring, lower minimums, extensive due diligence prior to investments being made, and access to investment managers that may not be available otherwise.
Fund of funds
A fund set up to distribute investments among a selection of private equity fund managers, who in turn invest the capital directly. Fund of funds are specialist private equity investors and have existing relationships with firms. They may be able to provide investors with a route to investing in particular funds that would otherwise be closed to them. Investing in fund of funds can also help spread the risk of investing in private equity because they invest the capital in a variety of funds.
The total amount of capital committed by the investors of a venture capital fund.
Fundamental Investment Analysis
Analysis that is company specific and often includes a focus on earnings, dividends and cash flow prospects. Consideration is also given to future interest rates and a risk evaluation of the company.
Generally Accepted Accounting Principles. The common set of accounting principles, standards and procedures. GAAP is a combination of authoritative standards set by standard-setting bodies as well as accepted ways of doing accounting.
Specialist advisers who assist institutional investors in their private equity allocation decisions. Institutional investors with little experience of the asset class or those with limited resources often use them to help manage their private equity allocation. Gatekeepers usually offer tailored services according to their clients' needs, including private equity fund sourcing and due diligence through to complete discretionary mandates.
Global Depositary Receipt (GDR's). Receipts for shares in a foreign based corporation traded in capital markets around the world. While ADR's permit foreign corporations to offer shares to American citizens, GDR's allow companies in Europe, Asia and the US to offer shares in many markets around the world.
The party with the general responsibility and liability for a particular limited partnership or other private placement vehicle.
General partner clawback
This is a common term of the private equity partnership agreement. To the extent that the general partner receives more than its fair share of profits, as determined by the carried interest, the general partner clawback holds the individual partners responsible for paying back the limited partners what they are owed.
General partner contribution
The amount of capital that the fund manager contributes to its own fund in the same way that a limited partner does. This is an important way in which limited partners can ensure that their interests are aligned with those of the general partner. The U.S. Department of Treasury recently removed the legal requirement of the general partner to contribute at least 1 percent of fund capital. However, a 1 percent general partner contribution remains common, particularly among venture capital funds.
Geometric Average Return
see Compound Average Return
This occurs when an employee is required to relinquish unvested stock when terminating his employment contract early.
Employment contract of upper management that provides a large payout upon the occurrence of certain control transactions, such as a certain percentage share purchase by an outside entity or when there is a tender offer for a certain percentage of a company's shares. Discussed in more detail at The Executive Employment Agreement.
Investment in companies and industry groups expecting above average growth in both revenue and earnings. Generally high P/E, low/no dividends. Usually small-cap or micro-cap stocks. Normally hedged by shorting and/or options. Moderate volatility may be expected.
Hedge Fund Administrator
Services your clients and investors; supports you administratively and operationally; and provides you financial, tax and compliance reporting. This includes audits and tax coordination; compliance services such as anti-money laundering and know-your-client procedures required by the Patriot Act, and middle office services.
Hedge funds are a subset of the alternative investment asset class. The term usually refers to private investment vehicles that may utilize a wide range of investment strategies and instruments. Hedge funds include traditional stock and bond investments, but generally combine these with short sales, arbitrage, and leverage, not generally found in traditional stock and bond market strategies. Normally they are structured as limited partnerships, LLCs or offshore investment companies where the general partner receives an incentive fee.
The number of stocks required to hedge against the price risk of holding an option or convertible security.
A strategy designed to reduce investment risk using call options, put options, short selling, or futures contracts. A hedge can help lock in existing profits. Its purpose is to reduce the potential volatility of a portfolio, by reducing the risk of loss.
High Water Mark
High Water Mark is a loss carried forward. That is, if you make a $100 the first year and a $100 the second year, then lose $100 in the third and forth year, you are not really even. Rather the General Partner must make back your initial $200 gain before becoming eligible again for a performance fee.
A corporation that owns the securities of another, in most cases with voting control.
The amount of time an investor has held an investment. The period begins on the date of purchase and ends on the date of sale, and determines whether a gain or loss is considered short-term or long-term, for capital gains tax purposes.
A newly issued stock that is in great public demand. Technically, it is when the secondary market price on the effective date is above the new issue offering price. Hot issues usually experience a dramatic rise in price at their initial public offering because the market demand outweighs the supply.
The minimum investment return a fund must exceed before a performance allocation/incentive fee can be deducted. Frequently LIBOR, Tbills, a certain percentage, or other benchmarks.
The internal rate of return that a fund must achieve before its general partners or managers may receive an increased interest in the proceeds of the fund. Often, if the expected rate of return on an investment is below the hurdle rate, the project is not undertaken.
Fee charged by the manager in addition to the management fee, that equals a percentage of profits, typically 20% collected either on a monthly, quarterly, or annual basis.
An entity designed to nurture business concepts or new technologies to the point that they become attractive to venture capitalists. An incubator typically provides both physical space and some or all of the services (legal, managerial, technical) needed for a business concept to be developed. Incubators often are backed by venture firms, which use them to generate early-stage investment opportunities.
A number calculated by weighting a number of prices or rates for a selected set of assets according to a set of predetermined rules (such as the S&P500 Index). The purpose of the index is to provide a single number that represents the market movement of the class of assets it represents.
The Information Ratio is the active premium divided by the tracking error. This measure explicitly relates the degree by which an investment has beaten a benchmark to the consistency by which the investment has beaten that same benchmark.
Initial Public Offering (IPO)
The sale or distribution of a stock of a portfolio company to the public for the first time. IPOs are often an opportunity for the existing investors (often venture capitalists) to receive significant returns on their original investment. During periods of market downturns or corrections the opposite is true.
Organizations that professionally invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.
A venture's intangible assets, such as patents, copyrights, trademarks, and brand name.
Interest Only (IO)
A security representing the coupon payments from an underlying pool of mortgages. IOs are sold at a deep discount to their notional principal amount. The primary risk is early principal prepayment, thereby eliminating interest payments.
A strategy normally relying upon both individual stock selection and general economic analysis of world markets. It entails investing in countries other than one's own domestic country, in order to benefit from other markets and provide diversification.
Investment Company Act of 1940
Investment Company Act shall mean the Investment Company Act of 1940, as amended, including the rules and regulations promulgated thereunder.
A letter signed by an investor purchasing unregistered long securities under Regulation D, in which the investor attests to the long-term investment nature of the purchase. These securities must be held for a minimum of 1 year before they can be sold.
The reinvestment of assets received as a lump-sum distribution from a qualified tax-deferred retirement plan. Reinvestment may be the entire lump sum or a portion thereof. If reinvestment is done within 60 days, there are no tax consequences.
Internal Rate of Return. A typical measure of how VC Funds measure performance. IRR is a technically a discount rate which is the rate at which the present value of a series of investments is equal to the present value of the returns on those investments.
Incentive Stock Option. Plan which qualifying options are free of tax at the date of grant and the date of exercise. Profits on shares sold after being held at least 2 years from the date of grant or 1 year from the date of exercise are subject to favorable capital gains tax rate.
The price per share deemed to have been paid for a series of Preferred Stock. This number is important because Cumulative Dividends, the Liquidation Preference and Conversion Ratios are all based on Issue Price. In some cases, it is not the actual price paid. The most common example is where a company does a bridge financing (a common way for investors to provide capital without having to value the Company as a whole) and sells debt that is convertible into the next series of Preferred Stock sold by the Company at a discount to the Issue Price.
The amount of common shares that a corporation has sold (issued).
Refers to the organization issuing or proposing to issue a security.
The Jensen Alpha quantifies the extent to which an investment has added value relative to a benchmark. The Jensen Alpha is equal to the investment's average return in excess of the risk free rate minus the Beta times the benchmark's average return in excess of the risk free rate.
Professional management attracted by the founder to run the company. Key employees are typically retained with warrants and ownership of the company.
Key man clause
If a specified number of key named executives cease to devote a specified amount of time to the Partnership, which may also include time spent on other funds managed by the manager, during the commitment period, the "key man" clause provides that the manager of the fund is prohibited from making any further new investments (either automatically or if so determined by investors) until such a time that new replacement key executives are appointed. The manager will, however, usually be permitted to make any investments that had already been agreed to be made prior to such date.
Measures the flatness of the tails of any investment distribution. A flat-tailed distribution has an increased chance of a large positive or negative realization. Kurtosis should not be confused with skewness, which measures the flatness of one tail. Kurtosis is sometimes referred to as the volatility of volatility.
A fund investment strategy involving financing for the expansion of a company that is producing, shipping and increasing its sales volume. Later stage funds often provide the financing to help a company achieve critical mass in order to position its
Also known as a bell cow investor. Member of a syndicate of private equity investors holding the largest stake, in charge of arranging the financing and most actively involved in the overall project.
An investment that has a poor or negative rate of return. An old venture capital adage claims that "lemons ripen before plums."
The practice of borrowing to add to an investment position when one believes that the return from the position will exceed the cost of borrowed funds. Both institutional and individual investors can use leverage. It is not uncommon to see hedge fund managers utilize leverage in order to increase returns. Leverage can have the effect of magnifying returns as well as losses.
Leveraged Bond Fund
An investment strategy designed to profit primarily from principal appreciation by utilizing leverage to purchase government bonds and to a lesser extent, fixed-income derivatives. The holding period is normally short to medium term and low volatility may be anticipated.
Leveraged Buyout (LBO)
A takeover of a company, using a combination of equity and borrowed funds. Generally, the target company's assets act as the collateral for the loans taken out by the acquiring group. The acquiring group then repays the loan from the cash flow of the acquired company. For example, a group of investors may borrow funds, using the assets of the company as collateral, in order to take over a company. Or the management of the company may use this vehicle as a means to regain control of the company by converting a company from public to private. In most LBOs, public shareholders receive a premium to the market price of the shares.
Limited partner clawback
This is a common term of the private equity partnership agreement. It is intended to protect the general partner against future claims, should the general partner of the limited partnership become the subject of a lawsuit. Under this provision, a fund's limited partners commit to pay for any legal judgment imposed upon the limited partnership or the general partner. Typically, this clause includes limitations in the timing or amount of the judgment, such as that it cannot exceed the limited partners' committed capital to the fund.
Usually investors in a limited partnership with no management activity or responsibility. The liability or risk is limited to the amount of invested capital with no personal assets at risk. A limited partner has limited liability.
An organization comprised of a general partner, who manages a fund, and limited partners, who invest money but have limited liability and are not involved with the day-to-day management of the fund. In the typical venture capital fund, the general partner receives a management fee and a percentage of the profits (or carried interest). The limited partners receive income, capital gains, and tax benefits.
The amount per share that a holder of a given series of Preferred Stock will receive prior to distribution of amounts to holders of other series of Preferred Stock of Common Stock. This is usually designated as a multiple of the the Issue Price, for example 2X or 3X, and there may be multiple layers of Liquidation Preferences as different groups of investors buy shares in different series. For example, holders of Series B Preferred Stock may be entitled to receive 3X their Issue Price, and then if any money is left, holders of Series A Preferred Stock may be entitled to receive 2X their Issue Price and then holders of Common Stock receive whatever is left. The trigger for the payment of the Liquidation Preference is a sale or liquidation of the company, such as a merger or other transaction where the company stockholders end up with less than half of the ownership of the new entity or a liquidation of the company.
1) The process of converting securities into cash. 2) The sale of the assets of a company to one or more acquirers in order to pay off debts. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.
The ease of converting an invested asset to cash or liquid capital. Lack of liquidity can limit an investor as to the timing of withdrawals from a particular account or strategy. For example an investor may have to give 45 days notice to withdraw cash from a particular investment vehicle.
An event that allows a VC to realize a gain or loss on an investment. The ending of a private equity provider's involvement in a business venture with a view to realizing an internal return on investment. Most common exit routes include Initial Public Offerings [IPOs], buy backs, trade sales and secondary buy outs. See also Exit strategy
An extra component of yield or return required to compensate the investor for the possibility that an adequate retail market may not develop for a security.
The period of time, often one year, during which hedge-fund investors are initially prohibited from redeeming their shares. This is a long-biased investment strategy. It's an approach taken by fund managers who tend to hold considerably more long positions than short positions.
The period of time that certain stockholders have agreed to waive their right to sell their shares of a public company. Investment banks that underwrite initial public offerings generally insist upon lockups of at least 180 days from large shareholders (1% ownership or more) in order to allow an orderly market to develop in the shares. The shareholders that are subject to lockup usually include the management and directors of the company, strategic partners and such large investors. These shareholders have typically invested prior to the IPO at a significantly lower price to that offered to the public and therefore stand to gain considerable profits. If a shareholder attempts to sell shares that are subject to lockup during the lockup period, the transfer agent will not permit the sale to be completed.
A directional investment strategy that involves equity-oriented investing on both the long and short sides of the market. The objective is not to be market neutral. Managers have the ability to shift from value to growth, from small to medium to large capitalization stocks, and from a net long position to a net short position. Managers may use futures and options to hedge. The focus may be regional, such as long/short US or European equity, or sector specific, such as long and short technology or healthcare stocks. Long/short equity funds tend to build and hold portfolios that are substantially more concentrated than those of traditional stock funds.
The point at which 75% of all returns in a group are greater and 25% are lower.
An investment strategy that is primarily an opportunistic "top-down" approach, based on shifts in global economies. Hedge fund managers that specialize in this strategy base their investment decision-making on economic outlook and speculate on changes in countries' economic policies, changes in currency and interest rate, and mis-pricing in general. The use of derivatives and leverage is not uncommon.
An investment strategy that invests in listed financial and commodity futures markets and currency markets around the world. The managers are usually referred to as Commodity Trading Advisors, or CTAs. Trading disciplines are generally systematic or discretionary. Systematic traders tend to use price and market specific information (often technical) to make trading decisions, while discretionary managers use a judgmental approach.
Management buy-out (MBO)
A private equity firm will often provide financing to enable current operating management to acquire or to buy at least 50 per cent of the business they manage. In return, the private equity firm usually receives a stake in the business. This is one of the least risky types of private equity investment because the company is already established and the managers running it know the business - and the market it operates in - extremely well.
A fee collected by the manager that typically offsets any fund expenses. The fee is usually asset based, and is, on average, 1% collected either on a monthly, quarterly, or annual basis.
The persons who oversee the activities of a venture capital fund.
Is a right of an investor to require the company to repurchase some or all of an investor's shares at a stated price at a given time in the future. The purchase price is usually the Issue Price, increased by Cumulative Dividends, if any. Mandatory Redemption may be automatic or may require a vote of the series of Preferred Stock having the redemption right.
The use of money borrowed from a broker/dealer using securities as collateral to purchase securities, a form of leverage.
Mark to Market
When securities are sold short they are placed in a short account within a general margin account. The resulting credit balance is isolated within the short account and adjusted weekly by the brokerage firm by a process called "marking to the market." This is an accounting procedure required for maintaining the credit balance in the short account equal to the market value of the short positions.
The total dollar value of all outstanding shares. Computed as shares multiplied by current price per share. Prior to an IPO, market capitalization is arrived at by estimating a company's future growth and by comparing a company with similar public or private corporations. (See also Pre-Money Valuation)
A type of investment strategy that is intended to be "neutral" to traditional market volatility. The strategy seeks to provide a stated or absolute return rather than attempt to outperform a traditional market index. The goal is to attain the target return regardless of broad market direction.
A hedge fund manager that selects asset allocations in anticipation of movements in the broad market.
A top-down investment strategy that shifts capital from one asset class to another, profiting from movements in interest rates and equity markets. It usually involves large commitments to one or more asset classes depending on the economic or market outlook, with a portfolio frequently being invested 100% in either stocks, bonds or cash equivalents. It is based on anticipating the timing of when to be in and out of markets.
A common hedge-fund structure through which a manager sets up two separate vehicles -- one based in the U.S. and an offshore fund that is domiciled outside the U.S. -- which serve as the only investors for a third non-U.S. fund. The two smaller entities are known as feeder funds, while the large offshore vehicle acts as the master fund. The purpose of such an arrangement is to create a single investment vehicle for both U.S. and non-U.S. investors.
Maximum Annual Drawdown
The maximum percentage decrease from an equity high to an equity low for the year.
An activity that includes corporate finance activities, such as advice on complex financings, merger and acquisition advice (international or domestic), and at times direct equity investments in corporations by the banks.
Combination of two or more corporations in which greater efficiency is supposed to be achieved by the elimination of duplicate plant, equipment, and staff, and the reallocation of capital assets to increase sales and profits in the enlarged company.
Debt that incorporates equity-based options, such as warrants, with a lower-priority debt. Mezzanine debt is actually closer to equity than debt, in that the debt is usually only of importance in the event of bankruptcy. Mezzanine debt is often used to finance acquisitions and buyouts, where it can be used to prioritize new owners ahead of existing owners in the event that a bankruptcy occurs.
Refers to the stage of venture financing for a company immediately prior to its IPO. Investors entering in this round have lower risk of loss than those investors who have invested in an earlier round. Mezzanine level financing can take the structure of preferred stock, convertible bonds or subordinated debt.
Firms with growth prospects of more than 20 percent annually and five-year revenue projections between $10 million and $50 million. Less than 10 percent of all start-ups annually, these entrepreneurial firms are the backbone of the U.S. economy and attractive to business angel investors.
A type of bond that represents a large pool of individual mortgage loans. Investors receive monthly interest and principal concurrent with the payment of the loan by the borrower. Most mortgage loans are backed by an agency of the U.S. government.
An investment strategy that involves utilization of several distinct strategies such as growth, risk arbitrage, macro, etc. in an effort to gain increased diversification. Funds of Funds are typically multi strategy.
A mutual fund, or an open-end fund, sells as many shares as investor demand requires. As money flows in, the fund grows. If money flows out of the fund the number of the fund's outstanding shares drops. Open-end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund. In order to sell shares an investor usually sells the shares back to the fund. If an investor wishes to buy additional shares in a mutual fund, the investor must buy newly issued shares directly from the fund. (See Closed-end Funds)
The National Association of Securities Dealers. A mandatory association of brokers and dealers in the over the counter securities business. Created by the Maloney Act of 1938, an amendment to the Securities Act of 1934.
An automated information network which provides brokers and dealers with price quotations on securities traded over the counter.
Net asset value (per share)--the market value of a fund share. It equals the closing market value of all securities within a portfolio plus all other assets such as cash, subtracting all liabilities (including fees and expenses), and then dividing the result by the total number of shares outstanding.
NDA (Non-disclosure agreement)
An agreement issued by entrepreneurs to potential investors to protect the privacy of their ideas when disclosing those ideas to third parties.
Net Asset Value (NAV)
NAV is calculated by adding the value of all of the investments in the fund and dividing by the number of shares of the fund that are outstanding. NAV calculations are required for all mutual funds (or open-end funds) and closed-end funds. The price per share of a closed-end fund will trade at either a premium or a discount to the NAV of that fund, based on market demand. Closed-end funds generally trade at a discount to NAV.
Net Financing Cost
Also called the cost of carry or, simply, carry, the difference between the cost of financing the purchase of an asset and the asset's cash yield. Positive carry means that the yield earned is greater than the financing cost; negative carry means that the financing cost exceeds the yield earned.
The net earnings of a corporation after deducting all costs of selling, depreciation, interest expense and taxes.
Net Market Exposure
The amount of a portfolio exposed to market risk because it is not matched by an offsetting position. It typically refers to the net difference between net long positions and net short positions. For example, a portfolio that is 100% long and 60% short has a net market exposure of 40%.
Net present value (NPV)
A firm or project's net contribution to wealth. This is the present value of current and future income streams, minus initial investment.
Net Present Value
An approach used in capital budgeting where the present value of cash inflow is subtracted from the present value of cash outflows. NPV compares the value of a dollar today versus the value of that same dollar in the future after taking inflation and return into account.
A stock or bond offered to the public for the first time. New issues may be initial public offerings by previously private companies or additional stock or bond issues by companies already public. New public offerings are registered with the Securities and Exchange Commission. (See Securities and Exchange Commission and Registration).
No Shop, No Solicitation Clauses
A no shop, no solicitation, or exclusivity, clause requires the company to negotiate exclusively with the investor, and not solicit an investment proposal from anyone else for a set period of time after the term sheet is signed. The key provision is the length of time set for the exclusivity period.
A "no fault divorce" clause permits investors at a time after the final closing date, to remove the general partner of a fund and either terminate the Partnership or appoint a new general partner. This clause covers situations where the general partner has not defaulted or breached the terms and conditions of the Limited Partnership Agreement. Either an ordinary consent or a special consent may be required to effectuate the removal of the general partner and this clause will usually be subject to the general partner receiving compensation for its removal.
An investor not considered accredited for a Regulation D offering. (Accredited Investor)
An agreement often signed by employees and management whereby they agree not to work for competitor companies or form a new competitor company within a certain time period after termination of employment. Governed by state law.
The New York Stock Exchange. Founded in 1792, the largest organized securities market in the United States. The Exchange itself does not buy, sell, own or set prices of stocks traded there. The prices are determined by public supply and demand. Also known as the Big Board.
Offshore Hedge Fund
An unregistered investment fund domiciled outside the U.S. and open only to non-U.S. investors or U.S. tax-exempt accredited investors. Bermuda, the Cayman Islands and other international tax havens are popular locations for offshore funds to be domiciled in due to privacy and tax advantages.
An open-end fund, or a mutual fund, generally sells as many shares as investor demand requires. As money flows in, the fund grows. If money flows out of the fund the number of the fund's outstanding shares drops. Open-end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund. In order to sell shares an investor generally sells the shares back to the fund. If an investor wishes to buy additional shares in a mutual fund, the investor generally buys newly issued shares directly from the fund.
The number of shares set aside for future issuance to employees of a private company.
Original Issue Discount
OID. A discount from par value of a bond or debt-like instrument. In structuring a private equity transaction, the use of a preferred stock with liquidation preference or other clauses that guarantee a fixed payment in the future can potentially create adverse tax consequences. The IRS views this cash flow stream as, in essence, a zero coupon bond upon which tax payments are due yearly based on "phantom income" imputed from the difference between the original investment and "guaranteed" eventual payout. Although complex, the solution is to include enough clauses in the investment agreements to create the possibility of a material change in the cash flows of owners of the preferred stock under different scenarios of events such as a buyout, dissolution or IPO.
Over-the-Counter. A market for securities made up of dealers who may or may not be members of a formal securities exchange. The over-the-counter market is conducted over the telephone and is a negotiated market rather than an auction market such as the NYSE.
The amount of common shares of a corporation which are in the hands of investors. It is equal to the amount of issued shares less treasury stock.
In a rights issue, arrangement by which shareholders are given the right to apply for any shares that are not purchased.
Occurs when demand for shares exceeds the supply or number of shares offered for sale. As a result, the underwriters or investment bankers must allocate the shares among investors. In private placements, this occurs when a deal is in great demand because of the company's growth prospects.
The amount of committed capital a limited partner has actually tranferred to a venture fund. Also known as the cumulative takedown amount.
At an equal rate or pace, without preference.
A preferred stock in which the holder is entitled to the stated dividend, and also to additional dividends on a specified basis upon payment of dividends to the common stockholders. The preferred stock entitles the owner to receive a predetermined sum of cash (usually the original investment plus accrued dividends) if the company is sold or has an IPO. The common stock represents additional continued ownership in the company.
Describes a right of a holder of Preferred Stock to enjoy both the rights associated with the Preferred Stock and also participate in any benefit available to Common Stock, without converting to Common Stock. This may occur with Liquidation Preferences, for example, a series of Preferred Stock may have the right to receive its Liquidation Preference and then also share in whatever money is left to be distributed to the holders of Common Stock. Dividends may also be "Participating" where after a holder of Preferred Stock receives its Cumulative Dividend it also receives any dividend paid on the Common Stock.
The contract that specifies the compensation and conditions governing the relationship between investors (LP's) and the venture capitalists (GP's) for the duration of a private equity fund's life.
A nontaxable entity in which each partner shares in the profits, loses and liabilities of the partnership. Each partner is responsible for the taxes on its share of profits and loses.
Pay to Play
A "Pay to Play" provision is a requirement for an existing investor to participate in a subsequent investment round, especially a Down Round. Where Pay to Play provisions exist, an investor's failure to purchase its rata portion of a subsequent investment round will result in conversion of that investor's Preferred Stock into Common Stock or another less valuable series of Preferred Stock.
Low priced issues, often highly speculative, selling at less than $5/share.
Percent Gain Ratio
Is a measure of the number of periods that the investment was up divided by the number of periods that a given benchmark was up. A high ratio indicates desirable performance.
A situation when a securities underwriter allows existing holdings of shares in a corporation to be sold in combination with an offering of new public shares.
PIK Debt Securities
(Payment in Kind) PIK Debt are bonds that may pay bondholders compensation in a form other than cash.
Acronym for private investment in public entities. Investments typically made by funds following Regulation D investment strategy.
Pooled Investment Vehicle. A legal entity that pools various investor's capital and deploys it according to a specific investment strategy.
A company that specializes in finding institutional investors that are willing and able to invest in a private equity fund or company issuing securities. Sometimes the "issuer" will hire a placement agent so the fund partners can focus on management issues rather than on raising capital. In the U.S., these companies are regulated by the NASD and SEC.
A right issued by a corporation as a preventative antitakeover measure. It allows rightholders to purchase shares in either their company or in the combined target and bidder entity at a substantial discount, usually 50%. This discount may make the takeover prohibitively expensive.
A method of calculating an aggregate IRR by summing cash flows together to create a portfolio cash flow. The IRR is subsequently calculated on this portfolio cash flow.
Companies in which a given fund has invested.
The valuation of a company immediately after the most recent round of financing. For example, a venture capitalist may invest $3.5 million in a company valued at $2 million "pre-money" (before the investment was made). As a result, the startup will have a post-money valuation of $5.5 million.
A shareholder's right to acquire an amount of shares in a future offering at current prices per share paid by new investors, whereby his/her percentage ownership remains the same as before the offering.
Shares of a firm that encompass preferential rights over ordinary common shares, such as the first right to dividends and any capital payments.
A dividend ordinarily accruing on preferred shares payable where declared and superior in right of payment to common dividends.
See hurdle rate.
Preferred return (AKA Hurdle Rate)
The minimum return to investors to be achieved before a carry is permitted. A hurdle rate of 10% means that the private equity fund needs to achieve a return of at least 10% per annum before the profits are shared according to the carried interest arrangement.
A class of capital stock that may pay dividends at a specified rate and that has priority over common stock in the payment of dividends and the liquidation of assets. Many venture capital investments use preferred stock as their investment vehicle. This preferred stock is convertible into common stock at the time of an IPO.
The valuation of a company prior to a round of investment. This amount is determined by using various calculation models, such as discounted P/E ratios multiplied by periodic earnings or a multiple times a future cash flow discounted to a present cash value and a comparative analysis to comparable public and private companies.
A large bank or securities firm that provides various administrative, back-office and financing services to hedge funds and other professional investors. Prime brokers can provide a wide variety of services, including trade reconciliation (clearing and settlement), custody services, risk management, margin financing, securities lending for the purpose of carrying out short sales, record keeping, and investor reporting. A prime brokerage relationship doesn't preclude hedge funds from carrying out trades with other brokers, or even employing others as prime brokers. To compete for business, some prime brokers act as incubators for funds, providing office space and services to help new fund managers get off the ground.
Principal Only (PO)
A zero-coupon mortgage backed security. POs are sold at deep discount to face value. They pay no periodic coupon interest. Principal is returned in the form of scheduled amortization and prepayments.
Any investment strategy that involves the purchase of equity in a private company. These strategies include leverage buyouts, venture capital investments, distressed debt investments and mezzanine debt investments.
Equity securities of companies that have not "gone public" (are not listed on a public exchange). Private equities are generally illiquid and thought of as a long-term investment. As they are not listed on an exchange, any investor wishing to sell securities in private companies must find a buyer in the absence of a marketplace. In addition, there are many transfer restrictions on private securities. Investors in private securities generally receive their return through one of three ways - an initial public offering, a sale or merger, or a recapitalization.
Also known as a Reg. D offering. The sale of a security (or in some cases, a bond) directly to a limited number of investors. Avoids the need for S.E.C. registration if the securities are purchased for investment as opposed to being resold. The size of the issue is not limited, but its sale is limited to a maximum of thirty-five nonaccredited investors.
Private Placement Memorandum
Also known as an Offering Memorandum. A document that outlines the terms of securities to be offered in a private placement. Resembles a business plan in content and structure.
Private securities are securities that are not registered and do not trade on an exchange. The price per share is set through negotiation between the buyer and the seller or issuer.
Entities that buy illiquid stakes in privately held companies, sometimes by participating in leveraged buyouts. Like hedge funds, the vehicles are structured as private investment partnerships in which only qualified investors may participate. Such funds typically charge a management fee of 1.5% to 2.5%, as well as an incentive fee of 25% to 30%. Most private-equity funds employ lock-up periods of five to ten years, longer than those of hedge funds.
A formal written offer to sell securities that provides an investor with the necessary information to make an informed decision. A prospectus explains a proposed or existing business enterprise and must disclose any material risks and information according to the securities laws. A prospectus must be filed with the SEC and be given to all potential investors. Companies offering securities, mutual funds, and offerings of other investment companies including Business Development Companies are required to issue prospectuses describing their history, investment philosophy or objectives, risk factors and financial statements. Investors should carefully read them prior to investing.
The right to sell a security at a given price (or range) within a given time period.
Rate of Return
Percentage appreciation in market value for an investment security or security portfolio.
The reorganization of a company's capital structure. A company may seek to save on taxes by replacing preferred stock with bonds in order to gain interest deductibility. Recapitalization can be an alternative exit strategy for venture capitalists and leveraged buyout sponsors. (See Exit Strategy and Leveraged Buyout)
The act a broker/dealer makes with an investor to confirm a transaction.
The common name for a preliminary prospectus, due to the red SEC required legend on the cover. (See Prospectus)
Redeemable Preferred Stock
Redeemable preferred stock, also known as exploding preferred, at the holder's option after (typically) five years, which in turn gives the holders (potentially converting to creditors) leverage to induce the company to arrange a liquidity event. The threat of creditor status can move the founders off the dime if a liquidity event is not occurring with sufficient rapidity.
Partial or whole liquidation of interests in an investment fund.
Fee charged upon a voluntary redemption from an investment vehicle.
Redemption notice period
Required notification period of an intended redemption request. Notification is usually required in writing.
The right or obligation of a company to repurchase its own shares.
An investment strategy in which investments are focused on specific regions of the world, e.g., Latin America, Pacific Rim, and Europe.
The right to require that a company register restricted shares. Demand Registered Rights enable the shareholder to request registration at any time, while Piggy Back Registration Rights enable the shareholder to request that the company register his or her shares when the company files a registration statement (for a public offering with the SEC).
The SEC's review process of all securities intended to be sold to the public. The SEC requires that a registration statement be filed in conjunction with any public securities offering. This document includes operational and financial information about the company, the management and the purpose of the offering. The registration statement and the prospectus are often referred to interchangeably. Technically, the SEC does not "approve" the disclosures in prospectuses.
SEC provision for simplified registration for small issues of securities. A Reg. An issue may require a shorter prospectus and carries lesser liability for directors and officers for misleading statements. The conditional small issues securities exemption of the Securities Act of 1933 is allowed if the offering is a maximum of $5,000,000 U.S. Dollars.
The regulation that outlines registration requirements for Securities Act of 1933.
Regulation D was adopted by the SEC under the provision of the Securities Act of 1933. Under regulation D, many issuances of equity securities are exempt from registration with the Securities and Exchange Commission. This regulation saves private investment partnerships a significant amount of time and money in the process of raising funds
Regulation D Offering
(See Private Placement)
Regulation D, is the rule (Reg. D is a "regulation" comprising a series of "rules") that allow for the issuance and sale of securities to purchasers if they qualify as accredited investors.
The rules relating to Offers and Sales made outside the US without SEC Registration.
Reg. S-B of the Securities Act of 1933 governs the Integrated Disclosure System for Small Business Issuers.
The Standard Instructions for Filing Forms Under Securities Act of 1933, Securities Exchange Act of 1934 and Energy Policy and Conservation Act of 1975.
The regulation that governs the requirements for financial statements under the Securities Act of 1933, and the Securities Exchange Act of 1934.
Congress created Real Estate Investment Trusts in 1960. A REIT is a company dedicated to owning and usually operating income producing real estate such as offices, warehouses, apartments and shopping centers. In order to qualify as a REIT an entity is legally required to pay virtually all of its taxable income to its shareholders every year.
Reorganization or Corporate Reorganization
Reorganizations are significant changes in the equity base of a company such as converting all outstanding shares to Common Stock, or combining outstanding shares into a smaller number of shares (a reverse split). A Reorganization is frequently done when a company has already had a few rounds of venture financing but has not been able to successfully increase the value of the company and therefore is doing a Down Round that is essentially a restart of the company.
Public securities that are not freely tradable due to SEC regulations. (See Securities and Exchange Commission)
Shares acquired in a private placement are considered restricted shares and may not be sold in a public offering absent registration, or after an appropriate holding period has expired. Non-affiliates must wait one year after purchasing the shares, after which time they may sell less than 1% of their outstanding shares each quarter. For affiliates, there is a two-year holding period.
The annual return divided by the estimated beta of the manager or index. It indicates how much return has been generated per unit of risk as defined by beta.
The annual return divided by annualized standard deviation. It indicates how much return has been generated per unit of risk as defined by standard deviation.
Right of First Refusal
The right of first refusal gives the holder the right to meet any other offer before the proposed contract is accepted.
Issuance of "rights" to current shareholders allowing them to purchase additional shares, usually at a discount to market price. Shareholders who do not exercise these rights are usually diluted by the offering. Rights are often transferable, allowing the holder to sell them on the open market to others who may wish to exercise them. Rights offerings are particularly common to closed-end funds, which cannot otherwise issue additional ordinary shares.
Exposure to uncertain change, upside (positive change) or downside (negative change). There are many types of risk associated with investments (e.g., market risk, political risk). There are also many statistical measures, such as standard deviation, used to understand and estimate risk associated with investments.
An investment strategy whereby a long position is taken in the stock of a company being acquired in a merger or takeover and a simultaneous short position is taken in the stock of the acquiring company. Returns are produced from the inequality of stock prices from announcement date of the merger until the transaction closes. Risk is often reduced by avoiding hostile takeovers and investing only in deals that are announced. Medium volatility may be expected.
The extra rate of return required to attract investors to an asset due to the incremental risk incurred from investing in it.
The chance of loss on an investment due to many factors including inflation, interest rates, default, politics, foreign exchange, call provisions, etc. In Private Equity, risks are outlined in the Risk Factors section of the Placement Memorandum.
Investment performance adjusted for the level of risk that the strategy is exposed to. Usually risk is measured by standard deviation or the volatility that is demonstrated by the strategy. Typically, investments showing high return will have an increased level of volatility or a higher standard deviation.
Rolling Rate of Return
The average return of a rolling performance period.
R-Squared (Coefficient of Determination)
Is a measure of how well a regression line fits the data. It indicates the percent of variation in the data that is explained by the regression line. R-Squared can vary between 0 and 1, where 1 indicates that 100% of the variation in the investment returns (dependent variable) is explained by the regression for the period measured.
Rule 144 provides for the sale of restricted stock and control stock. Filing with the SEC is required prior to selling restricted and control stock, and the number of shares that may be sold is limited.
A safe harbor exemption from the registration requirements of Section 5 of the 1933 Act for resales of certain restricted securities to qualified institutional buyers, which are commonly referred to as "QIBs." In particular, Rule 144A affords safe harbor treatment for reoffers or resales to QIBs - by persons other than issuers - of securities of domestic and foreign issuers that are not listed on a U.S. securities exchange or quoted on a U.S. automated inter-dealer quotation system. Rule 144A provides that reoffers and resales in compliance with the rule are not "distributions" and that the reseller is therefore not an "underwriter" within the meaning of Section 2(a)(11) of the 1933 Act. If the reseller is not the issuer or a dealer, it can rely on the exemption provided by Section 4(1) of the 1933 Act. If the reseller is a dealer, it can rely on the exemption provided by Section 4(3) of the 1933 Act.
Provides an exemption from the registration requirements of the Securities Act of 1933 for intrastate offerings, if certain requirements are met. One requirement is that 100% of the purchasers must be from within one state.
Rule 501 of Regulation D defines Accredited Investor.
Rule 505 of Regulation D is an exemption for limited offers and sales of securities not exceeding $5,000,000.
Rule 506 of Regulation D is considered a "safe harbor" for the private offering exemption of Section 4(2) of the Securities Act of 1933. Companies using the Rule 506 exemption can raise an unlimited amount of money if they meet certain exemptions.
Russell 1000® Index
The Russell 1000 Index consists of the 1,000 largest companies in the Russell 3000 Index, representing 89 percent of the total market capitalization of the Russell 3000.
Russell 2000® Growth Index
The Russell 2000 Growth Index contains those Russell 2000 securities with a greater-than-average growth orientation. Securities in this index generally have higher price-to-book and price-to-earnings ratios than those in the Russell 2000 Value Index.
Russell 2000® Small Stock Index
The Russell 2000 Small Stock Index is comprised of the 2000 smallest securities in the Russell 3000 Index, and includes reinvestment of dividends. It represents approximately 7 percent of the Russell 3000.
Russell 2000® Value Index
The Russell 2000 Value Index contains those Russell 2000 securities with a less-than-average growth orientation. Securities in this index generally have lower price-to-book and price-to-earnings ratios than those in the Russell 2000 Growth Index.
Russell 3000® Index
Measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.
A corporation that limits its ownership structure to 100. An S corporation does not pay taxes, rather, similar to a partnership, its owners pay taxes on their proportion of the corporation's profits at their individual tax rates.
Small Business Investment Company. A company licensed by the Small Business Administration to receive government leverage in order to raise capital to use in venture investing.
Partnerships that specialize in purchasing the portfolios of investee company investments of an existing venture firm. This type of partnership provides some liquidity for the original investors. These secondary partnerships, expecting a large return, invest in what they consider to be undervalued companies. The big difference is that they are buying their interests in a fund after the fund has been at least partially deployed in underlying portfolio companies. Unlike fund of fund managers, which generally invest in blind pools, secondary buyers can evaluate the underlying companies that they are indirectly investing in.
The market for the sale of partnership interests in private equity funds. Sometimes limited partners chose to sell their interest in a partnership, typically to raise cash or because they cannot meet their obligation to invest more capital according to the takedown schedule. Certain investment companies specialize in buying these partnership interests at a discount.
The sale of private or restricted holdings in a portfolio company to other investors. See secondary market definition.
An investment strategy that takes long and/or short positions in the companies of specific sectors of the economy, for example, biotechnology, financials, and information technology.
Securities Act of 1933
The federal law covering new issues of securities. It provides for full disclosure of pertinent information relating to the new issue and also contains antifraud provisions.
Securities Act of 1934
The federal law that established the Securities and Exchange Commission. The act outlaws misrepresentation, manipulation and other abusive practices in the issuance of securities.
Securities and Exchange Commission
The SEC is an independent, nonpartisan, quasi-judicial regulatory agency that is responsible for administering the federal securities laws. These laws protect investors in securities markets and ensure that investors have access to all material information concerning publicly traded securities. Additionally, the SEC regulates firms that trade securities, people who provide investment advice, and investment companies.
The first round of capital for a start-up business. Seed money usually takes the structure of a loan or an investment in preferred stock or convertible bonds, although sometimes it is common stock. Seed money provides startup companies with the capital required for their initial development and growth. Angel investors and early-stage venture capital funds often provide seed money.
Seed Stage Financing
An initial state of a company's growth characterized by a founding management team, business plan development, prototype development, and beta testing.
Securities that have a preferential claim over common stock on a company's earnings and in the case of liquidation. Generally, preferred stock and bonds are considered senior securities.
Series A Preferred Stock
The first round of stock offered during the seed or early stage round by a portfolio company to the venture investor or fund. This stock is convertible into common stock in certain cases such as an IPO or the sale of the company. Later rounds of preferred stock in a private company are called Series B, Series C and so on.
A ratio calculated by subtracting the risk-free (Treasury bill) rate from a portfolio's total return and then dividing this by its standard deviation. Because the numerator is the portfolio's risk premium, the resulting faction indicates the risk premium return earned per unit of total risk. It measures the reward-to-risk efficiency of an investment. The Sharpe ratio seeks to measure the total risk of the portfolio by including the standard deviation of returns rather than considering only the systematic risk by using beta. In general, a higher Sharpe ratio suggests stronger risk-adjusted performance.
A corporation with no assets and no business. Typically, shell corporations are designed for the purpose of going public and later acquiring existing businesses. Also known as Specified Purpose Acquisition Companies (SPACs).
An investment strategy based on the sale of securities that are overvalued from either a technical or fundamental viewpoint, normally used when a bear market is imminent. The investor does not own the shares sold. They are borrowed from a broker, in anticipation that the share price will fall and that shares may be bought later at a lower price and can then replace those borrowed earlier from the broker. Expected volatility may be very high.
The practice of borrowing a stock on collateral, immediately selling it on the market with the intention of buying it back later at a lower price.
Small Business Administration (SBA)
Provides loans to small business investment companies (SBICs) that supply venture capital and financing to small businesses.
Small Business Innovation Development Act of 1982
The Small Business Innovation Research (SBIR) program is a set-aside program (2.5% of an agency's extramural budget) for domestic small business concerns to engage in Research/Research and Development (R/R&D) that has the potential for commercialization. The SBIR program was established under the Small Business Innovation Development Act of 1982 (P.L. 97-219), reauthorized until September 30, 2000 by the Small Business Research and Development Enhancement Act (P.L. 102-564), and reauthorized again until September 30, 2008 by the Small Business Reauthorization Act of 2000 (P.L. 106-554).
Payment for brokerage services, such as research, through commissions or directed underwriting rather than fees.
Special purpose vehicle
A special company, usually outside the United States, established by a company to meet a specific financial problem, often to pay lower taxes (e.g., a reinvoicing subsidiary or offshore insurance company).
An investment strategy that focuses on investing in companies the will or are undergoing events that will affect the price of a stock. An example would be a merger, spin-off or restructuring.
A division or subsidiary of a company that becomes an independent business. Typically, private equity investors will provide the necessary capital to allow the division to "spin out" on its own; the parent company may retain a minority stake.
This is an antitakeover measure in which the election of the directors is split in separate periods so that only a percentage (e.g. one-third) of the total number of directors come up for election in a given year. It is designed to make taking control of the board of directors more difficult.
Standard & Poor's 500 Index (S&P 500®)
The S&P 500® is a registered trademark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates. It is an unmanaged index of the common stock prices of 500 widely held U.S. stocks. Standard & Poor's (a unit of The McGraw-Hill Companies, Inc.) calculates the market prices of these stocks, including the reinvestment of dividends as a way to track the performance of the stock market in general.
Standard & Poor's Midcap 400 Index (S&P 400)
The Standard &Poor's Midcap 400 Index is a market capitalization-weighted index of 400 medium-capitalization stocks.
A statistical measurement of the dispersion about a fund's average return over a specified time period. It describes how widely returns vary over a designated time period. Investors may examine historical standard deviation in conjunction with historical returns to decide whether a fund's volatility would have been acceptable given the returns it would have produced. A higher standard deviation indicates a wider dispersion of past returns and thus greater historical volatility. Standard deviation does not indicate how the fund actually performed, but merely indicates the volatility of its returns over time.
Market neutral relative value investment strategy that involves the utilization of a quantitatively based investment methodology that identifies securities or groups of securities that are currently trading at prices out of their historical range. Will involve establishing a long position in an undervalued security and short selling an overvalued security.
A method of voting for members of the Board of Directors of a corporation. Under this method, a shareholder receives one vote for each share and may cast those votes for each of the directorships. For example An individual owning 100 shares of stock of a corporation that is electing six directors could cast 100 votes for each of the six candidates. This method tends to favor the larger shareholders. Compare Cumulative Voting.
Stock Index Arbitrage
An investment strategy that involves buying a "basket" of stocks and selling short stock index futures contracts or vice versa.
A loan of a security from a legal holder to a borrower. The borrower uses the stock as their own, but remains liable to the loaner for all benefits the stock may produce such as dividends, etc. Stock lending began as a way to cover short sales, but has evolved by being incorporated into many hedge fund trading strategies.
1) The right to purchase or sell a stock at a specified price within a stated period. Options are a popular investment medium, offering an opportunity to hedge positions in other securities, to speculate on stocks with relatively little investment, and to capitalize on changes in the market value of options contracts themselves through a variety of options strategies. 2) A widely used form of employee incentive and compensation. The employee is given an option to purchase its shares at a certain price (at or below the market price at the time the option is granted) for a specified period of years.
Corporate or individual investors that add value to investments they make through industry and personal ties that can assist companies in raising additional capital as well as provide assistance in the marketing and sales process.
The application submitted by an investor wishing to join a limited partnership. All prospective investors must be approved by the General Partner prior to admission as a partner.
Agreements between at least two counter-parties to exchange cash flows in the future according to a pre-specified formula. They can therefore be regarded as portfolios of forward contracts. The most common one is an agreement on the exchange of a fixed rate for a floating rate contract.
Ownership of shares in a company resulting from work rather than investment of capital--usually founders receive "sweat equity".
Underwriters or broker/dealers who sell a security as a group. (See Allocation)
A number of investors offering funds together as a group on a particular deal. A lead investor often coordinates such deals and represents the group's members. Within the last few years, syndication among angel investors (an angel alliance) has become more common, enabling them to fund larger deals closer to those typifying a small venture capital fund.
Tag-Along Rights / Rights of Co-Sale
A minority shareholder protection affording the right to include their shares in any sale of control and at the offered price.
A takedown schedule means the timing and size of the capital contributions from the limited partners of a venture fund.
Types of business combinations in which shareholders do not incur tax liabilities. There are four types-A, B, C, and D reorganizations. They differ in various ways in the amount of stock/cash that can be offered. See Internal Revenue Code Section 368.
An offer to purchase stock made directly to the shareholders. One of the more common ways hostile takeovers are implemented.
A summary of the terms the investor is prepared to accept. A non-binding outline of the principal points which the Stock Purchase Agreement and related agreements will cover in detail.
Time Value of Money
The basic principle that money can earn interest, therefore something that is worth $1 today will be worth more in the future if invested. This is also referred to as future value.
Top down investing
An approach to investing in which an investor first looks at trends in the general economy, and next selects industries and then companies that should benefit from those trends.
Total Return Swap
Any swap in which the non-floating rate side is based on the total return of an equity or fixed income instrument with a life longer than the swap. Total return swaps are most common in equity or physical commodity markets, but they can be used in fixed income markets where the non-domestic holder of a fixed income security would be subject to a withholding tax, but where the withholding tax may be avoided if the debt instrument is held by a domestic investor who pays the total return to a foreign investor by way of a total return swap. Total return swaps are also used to transfer credit exposure.
Tracking Error is measured by taking the square root of the average of the squared deviations between the investment's returns and the benchmark's returns. It indicates the degree to which a manager deviates from index returns. A tracking error of 2% or less tends to indicate that the portfolio will perform similar to the index. A tracking error of 3% or higher, indicating that the portfolio deviates considerably (either favorably or unfavorably) from its benchmark index, is considered to be more actively managed.
The sale of the equity share of a portfolio company to another company.
The literal meaning of transparency is the state of being easily detected or seen through, readily understood, or free from pretense or deceit. Transparency in this sense refers to the ability of the investor to look through a hedge fund to its investment portfolio to determine compliance with the fund's investment guidelines and risk parameters, by examining a portfolio's positions.
Stock issued by a company but later reacquired. It may be held in the company's treasury indefinitely, reissued to the public, or retired. Treasury stock receives no dividends and does not carry voting power while held by the company.
The Treynor ratio is similar to the Sharpe Ratio, except it uses beta as the volatility measure (to divide the investment's return over the risk free rate).
UBTI, Unrelated Business Taxable Income, is a concern to tax exempt investors in a hedge fund because the receipt of UBTI requires the tax exempt entity to file a tax return that it would not otherwise have to file and pay taxes on income that would otherwise be exempt, at the corporate rate. UBTI includes most business operations income and does not include interest, dividends and gains from the sale or exchange of capital assets. Hedge Funds trade their own securities and therefor the tax exempt investor's share of such income of the hedge fund is not UBTI and not subject to federal income tax. However, hedge funds may subject tax exempt entities to UBTI under certain circumstances where the hedge fund is borrowing or purchasing securities on margin. Such transactions may subject the tax exempt to UBTI tax.
Uniform Limited Partnership Act, see also the RULPA, Revised Uniform Limited Partnership Act U.L.P.A. ¤ 101 et seq. (1976), as amended in 1985 (R.U.L.P.A.).
The Up Percentage Ratio is a measure of the number of periods that the investment outperformed the benchmark when the benchmark was up, divided by the number of periods that the benchmark was up. A high ratio indicates superior performance.
Up Capture Ratio
A measure of the investment's compound return when the benchmark was up divided by the benchmark's compound return when the benchmark was up.
The point at which 25% of all returns in a group are greater and 75% are lower.
An investment strategy that is based on acquiring out of favor securities whose prices do not yet reflect the companies' intrinsic value and/or are "underfollowed" by analysts. Normally asset, cash flow, book value based.
An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets. It is a type of financing sought by early-stage companies seeking to grow rapidly in which cash is typically exchanged for equity.
Venture Capital Financing
An investment in a startup business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.
Timetables for stock grants and options mandating that entrepreneurs earn (vest) their equity stakes over a number of years, rather than upon conversion of the stock options. This guarantees to investors and the market that the entrepreneurs will stick around, rather than converting and cashing in their shares.
The year in which the venture firm began making investments. Often, those funds with "vintage years" at the top of the market will have lower than average returns because portfolio company valuations were high, e.g an Internet Fund started in vintage year 1998.
Is the measure of the degree of dispersion of returns around the mean. Standard deviation is used as a statistical measure of this. Volatility is one of several investment risks.
is the right of a company to repurchase some or all of an investors' outstanding shares at a stated price at a given time in the future. The purchase price is usually the Issue Price, increased by Cumulative Dividends.
The common stockholders' right to vote their stock in the affairs of the company. Preferred stock usually has the right to vote when preferred dividends are in default for a specified amount of time. The right to vote may be delegated by the stockholder to another person.
A type of security that entitles the holder to buy a proportionate amount of common stock or preferred stock at a specified price for a period of years. Warrants are usually issued together with a loan, a bond or preferred stock --and act as sweeteners, to enhance the marketability of the accompanying securities. They are also known as stock-purchase warrants and subscription warrants.
A financing round whereby previous investors, the founders, and management suffer significant dilution. Usually as a result of a washout round, the new investor gains majority ownership and control of the company. Also known as burn-out or cram-down rounds.
Weighted Average Antidilution
The investor's conversion price is reduced, and thus the number of common shares received on conversion increased, in the case of a down round; it takes into account both (a) the reduced price and, (b) how many shares (or rights) are issued in the dilutive financing. See Broad-Based Ratchet and Narrow-Based Ratchet definitions.
Williams Act of 1968
An amendment of the Securities and Exchange Act of 1934 that regulates tender offers and other takeover related actions such as larger share purchases.
Wilshire 5000 Index
The Wilshire 5000 is an unmanaged, market capitalization-weighted index of approximately 7,000 U.S. equity securities.
Within The Hedge
A phrase describing an equity hedge portfolio in which long positions are matched by equal dollar amounts of short positions.
A negotiated agreement between the debtors and its creditors outside the bankruptcy process.
An investor can "wrap" a hedge fund investment with a private placement variable life insurance or annuity contract, eliminating the tax burden that frequently accompanies this style of investing.
The act of changing the value of an asset to an expense or a loss. A write-off is used to reduce or eliminate the value an asset and reduce profits.
An upward or downward adjustment of the value of an asset for accounting and reporting purposes. These adjustments are estimates and tend to be subjective; although they are usually based on events affecting the investee company or its securities beneficially or detrimentally.