Private Markets: Industry definitions

A range of money that an investor looks to commit to each vehicle in which it invests. In some cases, it is taken as an investor’s average commitment to funds it has committed to in the past, and can vary with different fund types.

The specified sum of capital an LP has agreed to contribute to a private capital fund. The sum of commitments to a private equity fund equals the total size of the fund.

Short-term loans provided by banks to private capital funds secured against the LP commitments in the fund.

The total amount invested in a specified asset class as a percentage of an investor’s total assets or total investment portfolio.

The actual act of transferring capital into the fund’s portfolio companies. When the GP has decided where it would like to invest the fund capital, it will approach its LPs in order to draw down some of the capital that has already been committed to the vehicle.

Company or asset acquired for investment purposes, that is not made through an investment in private funds or similar structures.

The amount of capital that has been committed to a private capital fund minus the amount that has been called by the GP for investment.

An investor that will commit to a fund before it has held a first close. The investor is usually given an incentive by the fund manager to make a commitment before the first close, such as reduced fees.

The first vehicle raised by a fund manager. Usually from a firm or fund management team that has not previously raised any funds.

Announced – a fund has been announced / the fund manager has confirmed directly that they are planning to start fundraising in the future.

Estimated – fund has been mentioned in the news or public domain that it is planned to start fundraising in the future.

Provides advice on the overall investment strategy of an institution.

The partner in a limited partnership responsible for all management decisions of the partnership. The GP has a fiduciary responsibility to act for the benefit of the limited partners (LPs)..

While the fund is in market it may have interim closes. These closes are named in the sequence they occur. The first interim close is termed ‘first close’, ‘second close’, ‘third close’, etc. Once the fund has held a first close, it can begin to make investments.

A firm that provides advisory services for a fee. Different consultants can be hired for an individual investor operating on different parts of their investment portfolios and/or strategies. Consultants can be:

Discretionary: Makes all investment decisions on behalf of an investor, but within specific guidelines.

Non-Discretionary: The investor retains the decision on whether or not to invest in the consultant’s recommendations.

Borrowed money to finance the acquisition of an asset or company.

Any ratio used to measure the ability of a company to meet its financial obligations; main factors likely include debt, equity, assets, and interest expenses.

Institutions or high-net-worth individuals/sophisticated investors that contribute capital to a fund.

Consists of the GP that makes the fund investments and the LPs that have committed capital to the fund. The partnership generally has a 10-year life span, although the capital is usually invested after 3-5 years, before the GP exits the underlying companies for a return on behalf of the LPs.

Instruments that are publicly traded on a stock exchange. This includes asset class specific-instruments like Real Estate Investment Trusts (REITs), as well as shares of other listed companies, and listed funds.

Senior equity on the capital structure over common or subordinate classes.

An investment vehicle that invests directly in a company or asset.

Refers to a broad spectrum of private investment funds that invest in unlisted companies and assets. Includes private equity, venture capital, private debt, real estate, infrastructure, and natural resources.

An investor’s preferred method for investing in private capital. Investors may have preferences for investing in unlisted or listed funds, or for investing directly in an asset class.

A dedicated vehicle created for the purpose of making an investment in a single target opportunity. Investors have full transparency on the underlying investment that will be made.

The specific segment of their portfolio from which investors allocate to a specific asset class. For example, natural resources investors may have a distinct allocation, or it may be considered part of their other allocation brackets such as private equity, real assets, or infrastructure.

Specifies the range of methods that a fund manager uses to raise capital to make investments. Fund managers can raise capital from listed or unlisted funds, separate accounts or their own balance sheet, or they can raise capital from investors on a deal-by-deal basis.

A fund management team that has spun out from a previous firm to create its own organisation to raise and manage funds under the umbrella of their new firm.

Pre-determined proportion of total assets to be invested in a specified asset class. Often a percentage, an investor will seek to reach or maintain this target in the long term.

One or several commercial or investment banks that structures, arranges, and administers a syndicated loan.

Involving a single lender and a single borrower.

A strategy that seeks attractive risk-adjusted returns throughout the fixed income universe by using a diverse set of investments.

Main underwriter or manager in a new issuance of a debt security.

A short-term loan providing immediate cash flow that is used until a company secures permanent financing. Loans are typically short-term, relatively high interest, and backed by collateral.

Loan requiring a balloon payment at the end of the term. This arrangement anticipates a refinancing of the loan to meet a payment obligation.

A security backed by a pool of debt, which includes several levels of credit ratings and repayment structures.

An indenture in a formal debt agreement for certain activities to be carried or not carried out.

A loan with limited restrictions on the debt-service capabilities of the borrower, including fewer restrictions on collateral and payment terms than traditional covenants.

Debt instrument backed exclusively by the creditworthiness and reputation of the issuer, generally issued by governments and corporations.

The practice of non-bank lenders extending loans to small and medium-sized businesses in return for debt securities rather than equity.

Debt of companies that have filed for bankruptcy or have a significant chance of filing for bankruptcy in the near future.

Earnings before Interest, Taxes, Depreciation, and Amortisation. Usually where cash flow for debt repayment is sourced.

Primary rights of a creditor to sell the collateral property of a borrower that fails to meet the obligations of a loan contract.

A predetermined rate for either the entirety or part of a loan term.

A variable interest rate that moves with market factors or an index. Opposite of a fixed rate.

Investments in debt securities that are below investment grade. Such bonds typically pay higher yields than investment-grade government or corporate bonds to compensate for the perceived higher risk of default.

Subordinated debt is a loan or security that ranks lower than other liabilities with regard to claims on assets or earnings. Subordinated debt is not repaid until after unsubordinated (senior) debt holders have been repaid in full and is consequently a riskier form of debt loan. Also known as a junior security or subordinated loan.

Investments in debt subordinate to the primary debt issuance and senior to equity positions.

A form of direct lending typically to smaller and more-leveraged companies than traditional direct lending.

Also referred to as ‘shadow bankers,’ any entity engaging in loan activity and not classified as a banking institution. Examples are private equity firms, specialty finance companies, and hedge funds

A loan that is in default or is close to being in default.

A direct loan transaction between a lender and borrower without involvement of a private equity sponsor.

Certificates evidencing the amount owed by the private placement borrower to the investor. Transferable on completion of a certificate sent to the borrower.

Arrangement that pays interest or dividends to investors of bonds, notes, or preferred stock with additional debt or equity instead of cash.

Loan made directly to a borrower/company.

Non-listed debt issues. May take the form of bonds, notes, or loans. Includes all non-bank lending.

Revising or replacing an older loan with new debt offering more favourable terms for the borrower.

A line of credit allowing the borrower to use funds when they are needed, depending on cash flow needs.

An alternative loan to be repaid using a percentage of the borrowing business’s revenue, traditionally found in industries such as mining, film production, and drug development.

Debts that are subordinate to the rights of other, more senior debts issued against the same collateral.

A loan sold on a secondary market.

A loan backed by the borrower’s assets, typically real estate, equipment, or cash flows.

Highest on the capital structure, a loan to be repaid first if the borrowing business fails.

A type of loan to a business that includes characteristics of both asset-based and cash-flow loans. Senior stretch loans are cheaper than cash-flow loans as the borrowing company has a healthy balance sheet.

Debt that is subordinated in its rights to receive its principal and interest payments from the borrower to the rights of the holders of senior debt. Such loans are sometimes secured by significant collateral; the firm will principally rely on the borrower’s cash flow for repayment. Additionally, the manager often receives warrants to acquire shares of stock in connection with these loans.

A company that has activities limited to buying and financing certain assets by issuing bonds to investors.

Classification covering several areas including distressed and mezzanine, where loan decision or grade is defined by something other than underlying company fundamentals.

A deal involving a third-party purchase of a company, typically a private equity firm.

Short-term loans provided to alternative asset fund managers to cover transactional costs, suppressing the need to immediately call up capital from limited partners.

Subordinated debt has a lower priority than senior debt holders in a company’s capital structure but is secured against some assets or collateral of the company.

A loan offered by a group of lenders that work together to provide funds to a single borrower.

Bank loan for a specific amount that has a pre-determined repayment schedule as well as a floating interest rate.

A sub-prime loan to a borrower with credit graded ‘B’ according to credit history.

A sub-prime loan to a borrower with credit graded ‘C’ according to credit history.

A type of debt combining senior and subordinated debt into one instrument. This instrument was created to simplify debt structure.

A loan not backed by collateral or assets.

Involves an existing asset or structure that requires improvements, repairs, or expansion. The infrastructure asset or structure is usually partially operational and may already be generating income.

Strategies target essential assets with limited operational risk where the asset is already generating returns. These are typically secondary stage assets in developed countries with transparent regulatory and political environments. Key features of the underlying assets include monopoly position, demonstrated demand, and long-term stable cash flows that are more easily forecastable.

Strategies typically target assets that exhibit similar characteristics to core assets but are more affected by and correlated with the economic cycle, thus exposed to demand and market risk. These assets do however have features that act to limit the aforementioned risks, including long-term contracts, long-term government or regulatory price support and/or high barriers to entry for competitors.

The combination of basic facilities which are helpful in economic development of a nation, region, or city. Includes energy, logistics, telecommunications, transportation, utilities, and waste management.

Involves an asset or structure that does not currently exist and needs to be designed and constructed. Investors fund the building of the infrastructure asset as well as the maintenance after it is designed, built, and operational.

A debt investment in which an investor loans capital to an infrastructure project or company for a defined period of time at a fixed interest rate. Bonds are traditionally issued by companies, municipalities, and both local and central governments.

Strategies tend to be less risky than other infrastructure strategies, targeting assets and/or infrastructure developers/owners, that produce regulated revenues for essential services or user revenues from assets with a monopoly position, as well as contracted assets. The risk/return exposure of the strategy depends on the type of debt provided, though most infrastructure assets are typically financed by senior debt and have simple capital structures.

Strategies have the highest- risk/return profile of infrastructure strategies, with less focus on stable cash flows and greater emphasis on capital growth via the value of the underlying assets. Assets will not typically have an existing cash flow.

The OECD is an intergovernmental economic organisation founded in 1961 committed to democracy and the market economy. The organisation aims to support sustainable economic growth, boost employment, raise living standards, maintain financial stability, assist other countries’ economic development, and contribute to growth in world trade. As of January 2020 there are 37 member countries: Australia, Austria, Belgium, Canada, Chile, Colombia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Latvia, Lithuania, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Turkey, the UK, and the US. Countries whole membership is under consideration is Argentina, Brazil, Bulgaria, Croatia, Peru, and Romania.

A form of PPP developed by the Australian and UK Governments.

Contractual agreements between public bodies, local authorities or central government, and private companies to deliver a public, social, or economic infrastructure project.

Generally applied to those assets that are tangible in nature, and often expected to provide valuation protection during inflationary periods. The definition of ‘Real Assets’ varies across the industry but can include real estate, infrastructure, and natural resources. Also known as Hard Assets.

Involves a fully operational asset or structure that requires no investment for development.

Assets that accommodate social services. Includes educational facilities, defence-related assets, government buildings, healthcare/medical facilities, and judicial buildings.

Strategies are deemed moderate to high risk, targeting assets where enhancements are being made, and where the growth in usage of said asset or demand for service provided or produced is the focus. These are typically greenfield or brownfield assets, potentially involving new or unproven technologies that do not have pricing power at the time of the investment but can be developed over time to have this at some time in the future.