60 plain-English definitions of private equity and venture capital terms — searchable, A-Z. No finance degree required.
An individual or entity that meets minimum income or net worth thresholds set by the SEC, and is therefore permitted to invest in private placements and other unregistered securities. The main thresholds are $200,000 in annual income (or $300,000 jointly) for two consecutive years, or $1 million in net worth excluding primary residence. Accredited status signals that investors can afford potential losses and understand associated risks.
A bolt-on purchase made by a private equity firm to expand an existing portfolio company — layering in complementary capabilities, customer bases, or geographies. Add-ons are a core value-creation lever, letting PE firms grow a platform company faster and more cheaply than organic development alone. Multiple add-ons can dramatically increase the size and attractiveness of a platform before exit.
The gradual repayment of a debt or the systematic write-down of an intangible asset over time. In LBO structures, amortisation refers to scheduled principal repayments on the acquisition debt — reducing the loan balance and, over time, the interest burden. Higher amortisation rates mean faster deleveraging and a cleaner balance sheet at exit.
A fund where capital is raised before specific investments are identified. Investors commit money based on the general partner's track record and stated strategy rather than a known list of assets. Most private equity and venture capital funds operate as blind pools, giving managers flexibility to deploy capital into opportunities as they arise.
Another term for an add-on — a smaller company purchased and integrated into an existing PE-owned platform company. Bolt-ons are used to add products, customers, talent, or geographic reach quickly and cost-effectively. The combined entity is typically worth more than the sum of its parts, illustrating the multiple-expansion logic PE firms apply.
Short-term capital provided to a company to cover immediate cash needs until a more permanent financing solution — such as a debt raise, equity round, or asset sale — is in place. Bridge loans typically carry higher interest rates and shorter maturities than permanent debt, reflecting the temporary and often urgent nature of the need.
A formal notice from a private equity fund to its limited partners, requesting that they transfer a portion of their committed capital by a specified date. LPs do not hand over all committed capital upfront — instead, the GP calls funds as investments are made. Failing to meet a capital call can result in penalties or forfeiture of the LP's interest.
A transaction in which a parent company sells or spins off a non-core business unit or division to a PE buyer. The carved-out entity becomes a standalone company — often with dedicated management, its own systems, and a fresh brand identity. Carve-outs can be complex because the new entity must build functions that were previously shared with the parent.
A provision in a fund agreement requiring the general partner to return previously paid carried interest if total fund performance falls below the hurdle rate by the time all capital is returned. Clawbacks protect LPs from situations where early profitable exits skew apparent GP performance ahead of later losses. They are a standard alignment mechanism in institutional PE.
An opportunity for LPs to invest directly alongside the PE fund in a specific deal, usually without paying the standard management fee or carried interest. Co-investments allow LPs to increase exposure to high-conviction deals at lower cost, while GPs benefit by deploying more capital into attractive opportunities than the fund alone can absorb.
The window — typically three to five years from the fund's closing date — during which the GP is permitted to call capital and make new investments. After the commitment period ends, the GP can still make follow-on investments but cannot initiate entirely new platform deals. This timeline shapes how quickly LPs should expect their capital to be deployed.
A contractual obligation in a loan agreement that requires the borrower to maintain certain financial ratios or meet operational standards. Financial covenants (e.g. maximum leverage, minimum interest coverage) protect lenders by triggering renegotiation or early repayment if the company's financial health deteriorates. Covenant-lite loans reduce these obligations, which is favoured by PE buyers but increases lender risk.
The contractual sequence in which proceeds from fund investments are distributed among LPs and the GP. A typical waterfall first returns all capital to LPs, then pays a preferred return, then splits remaining profits between LPs and the GP (carried interest). The waterfall structure incentivises the GP to maximise returns above the preferred return threshold.
A transaction in which a PE-owned company takes on new or additional debt specifically to pay a special dividend to its private equity owners. This allows the PE firm to realise some return before a formal exit, reducing risk — but it increases the company's leverage and the interest burden it must service going forward.
A fund performance metric that measures the cash actually returned to LPs as a multiple of the capital they have contributed. A DPI of 1.0x means LPs have received back everything they put in; above 1.0x represents net cash profit. Unlike IRR or TVPI, DPI measures only realised cash — making it the most conservative and tangible measure of PE performance.
The act of the fund calling committed capital from LPs — also called a capital call. The amount drawn down represents capital transferred from LP accounts to the fund for deployment into investments or to pay fund expenses. LP commitments are deployed in stages across the commitment period through multiple drawdowns.
The amount of committed but uncalled capital available to a private equity or venture capital fund. Dry powder represents the fund's future investment firepower — it has been promised by LPs but not yet deployed. Periods of high industry-wide dry powder can intensify competition for deals and push up acquisition prices.
The comprehensive investigation a PE firm conducts before completing an acquisition — covering financial statements, legal contracts, operational processes, management quality, customer relationships, and market dynamics. Due diligence reduces information asymmetry and informs the deal structure and price. Gaps uncovered during diligence often lead to price adjustments or deal abandonment.
Earnings Before Interest, Taxes, Depreciation, and Amortisation — the most widely used proxy for a company's operating cash flow in PE. EBITDA strips out financing and accounting decisions so buyers can compare companies on an apples-to-apples basis. Acquisition prices in PE are typically quoted as a multiple of EBITDA (e.g. 10x EBITDA).
EBITDA expressed as a percentage of revenue — a measure of operating profitability. Higher margins indicate a company retains more of each revenue dollar before interest, taxes, and non-cash charges. PE buyers focus on EBITDA margin improvement as a key value-creation lever, achieved through cost reduction, pricing power, or revenue mix improvement.
The total value attributed to a business, encompassing both equity and net debt. Enterprise Value equals market capitalisation (or equity purchase price) plus net debt (debt minus cash). EV is used to compare companies regardless of their capital structure, and is the basis for most PE deal valuation multiples such as EV/EBITDA.
The reduction in an existing shareholder's ownership percentage when new shares are issued. In VC and growth equity, dilution occurs with each funding round. Founders and early investors accept dilution in exchange for capital that funds growth. Anti-dilution provisions in term sheets protect certain investors from excessive dilution in down rounds.
The value attributable to the equity holders of a business — calculated as Enterprise Value minus net debt. In an LBO, equity value at exit is what the PE firm and management team receive after repaying all debt. This is the number that determines the fund's return on its equity investment.
The EV/EBITDA ratio at which a PE-owned company is sold or floated. If a company is acquired at 8x EBITDA and sold five years later at 12x EBITDA, that 4-turn multiple expansion contributes directly to investor returns alongside EBITDA growth and debt paydown. PE firms target exit multiples as a key performance driver alongside operational improvement.
An investment vehicle that allocates capital across multiple PE or VC funds rather than directly into companies. Fund-of-funds offer LPs diversification across managers, vintages, and strategies — but add an extra layer of fees. They are particularly useful for smaller institutional investors who lack the resources to conduct due diligence on individual PE managers.
The investment management firm that organises, manages, and makes investment decisions for a private equity fund. The GP has fiduciary obligations to the LPs, earns a management fee (typically 2% of committed capital) and carried interest (typically 20% of profits). The GP's principals often invest their own capital alongside the fund to align incentives.
A form of private investment in more mature companies that are profitable or near-profitable and seeking capital to accelerate growth — without the full leverage of a buyout. Growth equity investors typically take a minority stake, accepting lower control in exchange for exposure to established businesses with clear growth trajectories. It sits between venture capital and buyout on the risk spectrum.
The minimum annual return LPs must receive before the GP is entitled to collect carried interest. A typical hurdle rate is 8% per annum. Once LPs have been returned their capital plus the hurdle return, profits above that threshold are split with the GP. The hurdle rate ensures GPs are only rewarded for performance that genuinely exceeds a baseline threshold.
The annualised percentage return on an investment, taking into account the timing of all cash flows in and out. IRR is the primary PE performance metric — it rewards returning capital quickly as well as generating high absolute returns. A fund targeting 25% net IRR means it aims to grow LP capital at 25% per year after all fees and carried interest are paid.
The defined window — usually three to five years — during which a PE fund actively makes new platform investments. After the investment period, the fund typically manages and exits existing holdings but does not make new platform commitments. This timeframe shapes how a fund deploys capital and when LPs should expect their money to be returned.
The characteristic shape of a PE fund's net value over time — early losses give way to eventual gains, forming a J shape on a chart. In a fund's early years, management fees are paid out and investments are valued at cost or below, producing negative returns. As portfolio companies grow and exits materialise, cumulative returns turn positive and accelerate toward maturity.
The acquisition of a company using a significant amount of borrowed money, with the acquired company's assets and cash flows serving as collateral. The debt amplifies equity returns if the business performs well — but also amplifies losses if it does not. LBOs are the defining transaction type in private equity and require stable, predictable cash flows to service the debt load.
An investor in a private equity fund who provides capital but does not participate in day-to-day management decisions. LPs have limited liability — they can only lose the capital they have committed. Typical LPs include pension funds, sovereign wealth funds, endowments, insurance companies, family offices, and high-net-worth individuals. LPs receive the majority of fund profits after the GP's fees and carry.
An annual fee paid by LPs to the GP to cover the fund's operating costs — typically 1.5% to 2% of committed capital during the investment period, then shifting to a percentage of invested capital. The management fee pays for salaries, offices, legal, and diligence costs. It is separate from and typically much smaller in magnitude than the carried interest the GP earns on profitable exits.
Subordinated debt that sits between senior loans and equity in the capital structure. Mezzanine lenders accept higher risk than senior lenders (they are repaid second in a default) but earn higher returns — typically through a combination of interest and equity warrants or kickers. In LBOs, mezzanine plugs the gap between senior debt capacity and the total acquisition cost.
The gross return on a PE investment expressed as a multiple of the capital invested — for example, 3.0x means the investment returned three times the money put in. Unlike IRR, MOIC does not account for time — a 3x in two years and a 3x in seven years have the same MOIC but very different IRRs. Both metrics together give a fuller picture of performance.
The estimated current value of a fund's investments minus any liabilities, divided by the number of outstanding LP interests. NAV represents the fund's mark-to-market worth at a point in time. Unlike public markets, PE NAVs are updated quarterly using appraisal methods, which means they tend to be smoother and lag behind real market movements.
Latin for "on equal footing" — refers to securities or creditors that rank equally and receive proportional treatment. In PE, pari passu provisions in a term sheet mean that two classes of investors have identical rights regarding distributions or repayment. It is often a key negotiation point in venture deals with multiple preferred share classes.
The initial, typically larger acquisition a PE firm makes in a sector to serve as the foundation for a buy-and-build strategy. Subsequent add-on acquisitions are bolted onto the platform to create a larger, more valuable entity. The platform usually brings management depth, systems, and brand that smaller add-ons can leverage immediately after acquisition.
An arrangement where interest or dividends are paid in additional securities rather than in cash. PIK debt grows the principal balance over time because the "interest" is rolled up into the loan. It is used in situations where the company needs to conserve cash — but it increases overall debt and the risk of default if performance disappoints.
A business that a PE fund has invested in and currently owns, whether in full or in part. Portfolio companies are the fund's operating assets — the firms the GP works with to create value before exit. A typical mid-market PE fund may hold ten to fifteen portfolio companies across its investment period.
The minimum annual return LPs receive on their invested capital before the GP participates in profits — synonymous with the hurdle rate. Once LPs have been paid back at the preferred return, a catch-up clause typically allows the GP to receive a larger share of subsequent profits until the agreed profit-sharing ratio is reached. The preferred return aligns GP incentives with LP interests.
An asset class in which capital is raised from institutional and accredited investors and invested directly in private companies — or in public companies that are then taken private. Unlike public markets, PE investments are illiquid, long-term, and actively managed. The GP exercises significant influence over portfolio companies to drive operational improvement and profitable exits.
The right of an investor to participate in a future funding round in proportion to their existing ownership stake — thereby maintaining their percentage interest and avoiding dilution. Pro-rata rights are especially valuable in venture capital when a startup is growing rapidly. Term sheets often distinguish between major investors with full pro-rata rights and smaller investors with more limited participation rights.
A restructuring of a company's capital structure — typically to change the balance between debt and equity. In PE, a recap often involves adding debt (refinancing) to extract value for shareholders through a special dividend, or reducing debt after strong operational performance. Recaps let PE firms adjust leverage as market conditions and company performance evolve.
A measure of the unrealised, or "remaining," value in a fund relative to the capital LPs have contributed. RVPI represents what is still to come — the theoretical remaining return from assets not yet exited. Combined with DPI, it forms TVPI (Total Value to Paid-In), giving a complete picture of fund performance including both realised and unrealised value.
A transaction in which one PE firm sells a portfolio company to another PE firm. Secondary buyouts are common at the end of a fund's life when the GP needs to exit but the company is not ready for an IPO or strategic sale. The buying firm sees an opportunity to add further value under different management or with a fresh operational strategy.
The market for buying and selling LP interests in existing private equity funds before the fund reaches its natural end. LPs who need liquidity can sell their fund interests to secondary buyers at a discount. Secondary market activity has grown significantly as LPs seek flexibility and as secondary buyers have developed to provide this liquidity.
The deliberate shift of investment focus from one industry sector to another in response to changing economic conditions, valuations, or opportunities. PE firms may rotate away from highly priced sectors toward those with more attractive entry valuations. Unlike public market rotation, PE sector shifts play out slowly over fund cycles rather than in weeks or months.
The highest-priority debt in a company's capital structure — repaid first in the event of default or liquidation. In an LBO, senior debt typically comprises the largest portion of the debt stack and carries the lowest interest rate because lenders bear the least risk. Senior secured lenders hold liens on company assets as additional protection.
A transaction in which a parent company separates a business unit into an independent entity — distributing shares in the new company to existing shareholders or selling it outright. PE firms often target spin-offs as acquisition opportunities because the divested unit may have been underinvested or mismanaged within a large corporate structure, presenting clear improvement potential.
Debt that ranks below senior debt in the repayment hierarchy — paid back only after senior creditors have been made whole. Because subordinated lenders accept higher default risk, they charge higher interest rates and often receive equity warrants or other enhancements. Subordinated (or sub) debt sits between senior loans and equity in the capital stack.
A transaction in which a PE firm acquires all outstanding public shares of a listed company and delists it from the stock exchange. Take-privates are attractive when PE buyers believe public market pricing undervalues a company's potential, or when the company would benefit from a longer-term operational overhaul away from the scrutiny and quarterly reporting of public markets.
A non-binding document outlining the key terms of a proposed investment or acquisition — including price, deal structure, governance rights, and major conditions. Term sheets frame negotiations before definitive legal agreements are drafted. In VC, term sheets cover valuation, liquidation preference, anti-dilution, board composition, and pro-rata rights. In PE, they address purchase price, debt structure, reps and warranties, and closing conditions.
A comprehensive fund performance multiple that adds DPI (realised distributions) and RVPI (unrealised residual value), then divides the sum by the total capital LPs have contributed. A TVPI of 2.0x means that, on paper, every dollar invested has grown to two dollars in combined cash returned and remaining fund value. As exits occur, TVPI shifts from unrealised toward DPI.
A single, blended debt instrument that combines senior and subordinated debt into one facility with a single interest rate — simplifying the debt stack for the borrower. Unitranche financing is popular in mid-market LBOs because it reduces complexity and speeds up deal execution. The single lender (or lender group) handles all debt rather than requiring separate senior and mezzanine syndicates.
A form of private equity focused on investing in early-stage, high-growth companies — typically startups — in exchange for equity. VC investors accept high failure rates across their portfolios, expecting a small number of outsized winners to generate overall fund returns. Unlike buyout PE, VC rarely uses leverage and focuses on revenue growth rather than operational cash flow optimisation.
The year in which a PE fund made its first investment — used to classify and compare fund performance. Vintage year matters because macroeconomic conditions at the time of investment (credit availability, valuation levels, economic cycle stage) significantly influence returns. Comparing funds of the same vintage controls for these market-level effects and gives a fairer performance benchmark.
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