Private Equity Glossary [60+ Terms] | Moonfare (2024)

FAQs

What is the 80 20 rule in private equity? ›

Any profits over and above 10% shall be split between the General Partner & Limited Partner using a ratio of 20% for the General Partner and the remaining 80% for the Limited Partner.

The Catch-up period can be arranged so that the investor still receives distributions along with the Manager. For example, the dis- tribution split can be “50% to the investor and 50% to the Manager” until the Manager re- ceives 20% of all profits.

The term "vintage year" refers to the milestone year in which the first influx of investment capital is delivered to a project or company. This marks the moment when capital is committed by a venture capital fund, a private equity fund or a combination of sources.

What is the J-curve? In private markets, the J-curve is the term commonly used to describe the tendency for investors in closed-end funds to experience negative returns in the early years of a fund's life, particularly with primary (newly formed) fund investments.

The rule of 70 is used to determine the number of years it takes for a variable to double by dividing the number 70 by the variable's growth rate. The rule of 70 is generally used to determine how long it would take for an investment to double given the annual rate of return.

For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72 ÷ 10) = 7.2) to grow to $2. In reality, a 10% investment will take 7.3 years to double (1.10^7.3 = 2).

Clawbacks in Private Equity

It refers to the limited partners' right in private equity to reclaim a portion of the general partners' carried interest in cases where subsequent losses mean the general partners received excess compensation. Clawbacks are calculated when a fund is liquidated.

At its core, a private equity waterfall is a structured method for distributing cash flow profits from an investment fund, typically in a hierarchical manner. The name “waterfall” is quite fitting, as it describes the cascading flow of profits down a predetermined path.

What Are Waterfall Provisions? According to the American Bar Association, waterfall provisions outline how distributions move from an investment to the business's partners or members and are usually used in a limited liability company or partnership agreement.

Instant history bias, also known as "backfill bias," is a phenomenon whereby inconsistent reporting practices can unduly inflate the apparent performance of a hedge fund. This inaccuracy stems from the fact that hedge fund managers can elect whether and when to report their results to the public.

What is PCAP in private equity? ›

A PCAP statement, or partners' capital account statement, serves as a means of communication between private equity firms and investors. They provide detailed information regarding the terms, conditions, and risks associated with a particular private equity investment.

A J-curve depicts a trend that starts with a sharp drop and is followed by a dramatic rise. The trendline ends in an improvement from the starting point. In economics, the J-curve shows how a currency depreciation causes a severe worsening of a trade imbalance followed by a substantial improvement.

The ratio of the current value of remaining investments within a fund, plus the total value of all distributions to date, relative to the total amount of capital paid into the fund to date.

Marshall-Lerner condition and J curve effect)

A reduction in the exchange rate causes exports to become cheaper, which increases exports. This assumes that demand for exports is price elastic. It also causes imports to become relatively expensive. This means the UK current account deficit would improve.

Harvesting Period: After the investment period, private equity funds enter the harvesting period. During this phase, the GP works to improve the performance of portfolio companies, increase their value, and ultimately sell them for a profit.

The Pareto principle states that for many outcomes, roughly 80% of consequences come from 20% of causes. In other words, a small percentage of causes have an outsized effect. This concept is important to understand because it can help you identify which initiatives to prioritize so you can make the most impact.

The 20% performance fee is charged if the fund achieves a level of performance that exceeds a certain base threshold known as the hurdle rate. The hurdle rate could either be a preset percentage, or may be based on a benchmark such as the return on an equity or bond index.

The 80/20 rule, also known as the Pareto principle, suggests that a small number of causes (20%) often lead to a large number of effects (80%). In the context of fundraising, this principle suggests that a small number of donors (20%) may contribute the majority of funds (80%).

80% of your returns will usually come from 20% of your investments. 20% of your investors will usually represent 80% of the capital. For portfolio companies. 20% of your customers will usually represent 80% of your profits.