Asset Allocation − The process by which an Institutional Investor builds a Balanced Portfolio, blending different types of investments in order to maximise Risk Weighted Return while developing a Liquidity Profile which meets the needs of the fund's beneficiaries.

Buyback − The acquisition by a company of its own shares. Often seen in quoted markets, where public companies buy their own shares in order to reduce supply and hence enhance the share price. In certain situations a private equity backed companies may propose to buyback its investors' shares, thus delivering them an Exit.

Bond − a type of IOU issued by companies or institutions. They generally have a fixed interest rate and maturity value, so they're very low risk - much less risky than buying equity - but their returns are accordingly low.

Capital Gain − The difference between the cost of an asset - i.e. an investment in a fund or a company - and the proceeds realised on its sale. Because capital gains receive different - usually more favourable - taxation treatment than income, great efforts are expended in ensuring that as far as possible value creation is ascribed to the former rather than the latter.

Closing − This term can be confusing. If a fund-raising firm announces it has reached first or second closing, it doesn't mean that it is not seeking further investment. When fund raising, a firm will announce a first closing to release or drawdown the money raised so far so that it can start investing. A fund may have many closings, but the usual number is around three. Only when a firm announces a final closing is it no longer open to new investors.

Co-Investment − Although used loosely to describe any two parties that invest alongside each other in the same company, this term has a special meaning when referring to limited partners in a fund. If a limited partner in a fund has co-investment rights, it can invest directly in a company that is also backed by the private equity fund. The institution therefore ends up with two separate stakes in the company - one indirectly through the fund; one directly in the company. Some private equity firms offer co-investment rights to encourage institutions to invest in their funds.

The advantage for an institution is that it should see a higher return than if it invested all its private equity allocation in funds - it doesn't have to pay a management fee and won't see at least 20 per cent of its return swallowed by a fund's carried interest. But to co-invest successfully, institutions need to have sufficient knowledge of the market to assess whether a co-investment opportunity is a good one.

Dividend − A payment, authorised by a company's board of directors, to its shareholders. Dividends can only be paid out of net after tax profits and must be covered by retained profit reserves in the balance sheet.

Due Diligence − The process of verifying that the facts and assumptions on which an investment or acquisition decision has been made are accurate and sound. A range of different aspects will be covered by different advisers, including Market, or Commercial Due Diligence, Financial, Management, Legal, Technical and Environmental.

Drawdown − When a venture capital firm has decided where it would like to invest, it will approach its own 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.

Early-stage finance − This is the realm of the venture capital - as opposed to the private equity - firm. A venture capitalist will normally invest in a company when it is in an early stage of development. This means that the company has only recently been established, or is still in the process of being established - it needs capital to develop and to become profitable. Early-stage finance is risky because it's often unclear how the market will respond to a new company's concept. However, if the venture is successful, the venture capitalist's return is correspondingly high.

Equity − Ownership of a company, divided into Ordinary Shares or Common Stock. Equity investment implies taking the highest level of risk in providing business finance in exchange for an agreed proportion of its future value.

Equity Financing − Companies seeking to raise finance may use equity financing instead of or in addition to debt financing. To raise equity finance, a company creates new ordinary shares and sells them for cash. The new share owners become part-owners of the company and share in the risks and rewards of the company's business.

Equity Risk − The level of risk associated with an investment or loan when, should the company fail, there is no recourse to any other means of recovering the investment. Many types of security provided by private equity investors may carry contractual rights to repayment (e.g. Preference Shares, Shareholder Loans) but nevertheless represent an Equity Risk as, in reality, an underperforming company would not be able to meet those contractual commitments.

Equity Value − The value of a company after making allowance for repayment of all outstanding debt; i.e. the value which is attributed to its equity holders.

Fund of Funds − A private equity fund that invests not in individual companies but in other private equity funds. Used by Institutional Investors as a means of Diversification and of gaining excess to the fund selection expertise of the fund of fund's manager.

Fund Manager − Will invest assets and implement investment strategy.

Fund Raising − The process by which a private equity firm solicits financial commitments from limited partners for a fund.

General Partner − The manager of a Limited Partnership, which is the structure adopted by most private equity funds. In general usage, the term General Partner, or GP, refers to a private equity firm.

Initial public offering (IPO) − An IPO is the official term for 'going public'. It occurs when a privately held company - owned, for example, by its founders plus perhaps its private equity investors - lists a proportion of its shares on a stock exchange. IPOs are an exit route for private equity firms.

Internal rate of return (IRR) − This is the most appropriate performance benchmark for private equity investments. In simple terms, it is a time-weighted return expressed as a percentage. IRR uses the present sum of cash drawdowns (money invested), the present value of distributions (money returned from investments) and the current value of unrealised investments and applies a discount.The general partner's carried interest may be dependent on the IRR. If so, investors should get a third party to verify the IRR calculations.

Institutional Buyout ("IBO") − The acquisition of a company - invariably a large one - by private equity investors without the detailed involvement of its management.

Institutional Investors − Pension and endowment funds, insurance companies and other major financial institutions who invest capital in private equity funds.

Lead Investor − The dominant member of a Syndicate; usually the largest investor who takes the lead role in appraising, negotiating and managing the investment.

Leveraged Buyout (LBO) − A buyout which is predominantly financed by debt. Usually characterised by stable, low growth companies with strong and predictable cash flows.

Limited Partner − Generic term for an Institutional Investor in a private equity fund.

Limited Partnership − The most commonly used structure for a private equity fund. As a partnership, it is tax transparent - that is, each partner (i.e. investor) accounts directly for their own tax on income and Capital Gains arising from their share of the fund. The fund is managed by a General Partner - i.e. a private equity firm.

Management Buy-In − Where an outside manager or team purchases an ownership stake in a company and replaces the existing management team.

Management Buy-out − The acquisition of a company by its management team, usually in partnership with external lenders and/or private equity investors.

Mezzanine Financing (or Loan) − A junior loan which carries the right to participate in the Equity of the borrower, usually by carrying Options to purchase shares at a nominal value. Hence mezzanine lies somewhere between pure equity and pure debt finance. Mezzanine loans will usually carry a significantly higher interest rate than that which applies to Senior Debt, and will carry a long term (8 or more years) Bullet repayment.

Private Equity − This refers to the holding of stock in unlisted companies – companies that are not quoted on a stock exchange. It includes forms of venture capital and MBO financing.

Private Investment in Public Equity ("PIPE") − Investment by a private equity fund in a publicly quoted company. This will normally be undertaken by using Preference Shares or similar, which are not made available for purchase by other investors, and which are Convertible into Ordinary Shares (or Common Shares) at a pre agreed price; the investor will then achieve an exit by selling these in the stock market.

Secondary Funds − Funds which specialise in buying Secondary investments in other private equity funds.

Term sheet − A summary sheet detailing the terms and conditions of an investment opportunity.

Turnaround − Turnaround finance is provided to a company that is experiencing severe financial difficulties. The aim is to provide enough capital to bring a company back from the brink of collapse.

Venture/ Venture Capital − Capital which is subject to more than a normal degree of risk and is usually associated with a new business.