Learn the lingo of Private Equity Investing

Are you interested in private equity investing and want to learn about it, but you need basic information about terms used in this field? Don't worry! We're here to help. Keep on reading to understand the vocabulary of private equity investing and all the essential terms you need to know before investing in private equity.

Private Equity Terminologies:

Private Equity

Private equity is the capital invested in various private companies, which does not sell their stocks publicly or in the stock market. The equity is offered to a limited number of people who can help the company in different fields like management, production, or extending the business in the future. These companies are acquired for a longer tenure (usually 5-10 years) and sold for profit. The fund comes from different audiences that invest in exchange for private equity.

Private Equity Firm

The companies encourage investors to invest money with them so that the firm can utilize the funds to acquire the private equity of different companies.

Types of partners:

Following are the types of partners.

Limited Partners: The partners that invest money in private equity firms are the limited partners.
General Partners: These are the persons who manage private equity firms and decide where to invest and where not.

Types of Equity dilution:

Following are the significant types of equity selling.

Buyout: A buyout usually occurs when a single party acquires most of the company's equity. It happens because the party wants to control the interests of the company
Leveraged Buyouts: This is also a type of buyout, but in this type, the company offers equity in exchange for debt. The buyer can hold onto the equity till the time their debt with interest is not cleared
Distressed/Turnaround: The acquisition of a company at a low price when dealing with troubles and its financial condition is distressed is called turnaround or distressed.
Growth Equity: When a company needs funds for growth and sells a percentage of equity for the funds, this equity is called growth equity, as when the company uses your money, it's worth will increase

Types of Investments:

The following are the types of investment.

Initial Public Offering: When a company enters the stock market for the very first time to sell its stocks.
Add-on Acquisition: Add-on acquisition is the acquisition of a company to increase one's benefit. For example, Tata bought Jaguar to boost its business in the sports car domain.
Fund of Funds: Investing in the company's portfolio rather than directly investing in it is called a fund of funds.
Asset-Based Lending: The lending of money based on assets is allied to asset-based lending. One of the major benefits of this type of deal is that the lender gets priority in selling the asset in the case of the company's bankruptcy.
Co-investment: Investing directly in the company is called co-investment. This happens when an investor directly invests in the company and buys its equity. For example, one opens a company's franchise store and private equity.
Capital Commitments: An investor's commitment to invest in private equity funds periodically is said to be capital commitment. For example, an investor invests $ 100$ in a company and promises to give $ 100$ more in the upcoming month.
Capital Call: When general partners request limited partners to invest the funds they promised to invest in the company, this call is called the capital call.

Other must-to-be-known terms include.

Capital Gains: The Increase in the worth of a company when new partners get equity at a higher price is called capital gains. It is an increase in the value of capital we invested for the future profit generation.
Due Diligence: Predicting future growth by evaluating the company's progress is called due diligence. Private equity firms often do this to decide whether to keep or sell the company's equity.
EBITDA: EBITDA is abbreviated as Earnings before interest, taxes, depreciation, and amortization. The formula for EBITDA is Revenue-expenses = EBITDA. These expenses don't include marketing costs, taxes, miscellaneous expenses of the company, transportation costs, etc. It tells us whether the company is making money from its product.
Endowments: The amount a company holds on to for future operations or expansion.
Enterprise Value: The total cost of the company in the market includes the value of all of a company's assets, debts, and other holds in the market.
PE Fund Structure: PE Fund structure tells the company how much to dilute to get funds for a company. The limit of dilution of equity helps the company to use money wisely.
Hurdle Rate: A limited investor must receive minimum profit before profit sharing between the general partners.
Management Buyout: When different employees, like the COO and CEO, buy out the company to be the owner rather than employees.
Mezzanine Debt: This type of debt allows the lender to convert the debt into equity shares anytime.
Accredited Investor: An accredited investor has a net worth of over 1 million dollars for over two years. They are usually given preference over other partners in the company as they can help the company at a bad time.
Antitrust Laws: The laws or regulations in a state that discourage companies from creating their monopoly in the market. They usually restrict companies by limiting their power in a market.
Carried Interest: It is the profit that partners make for their investments in the private equity of a company. Usually, 20% of the total profit is further distributed among all partners.

Conclusion

In the nutshell, it is imperative for a newbie to be well-aware of all the basic and essential terminologies before entering private equity investment. The same is why we have formed this guide which talks about some of the basic terms you must know before entering the diverse market of private equity funds. These terms are used to talk about the company's profit and loss, and one should keep an eye on the numerical of these terms while investing in a company. So, save your time. Be a pro of private equity investments by understanding the much-needed information above.