Definitions

Private Equity: An investment in non-public securities of, typically, private companies. Also an investment asset class typically reserved for large institutional investors such as pension funds and endowments as well as high net worth individuals. Includes investments in privately-held companies ranging from start-up companies to well-established and profitable companies to bankrupt or near bankrupt companies. Examples of private equity include venture capital, leveraged buyout, growth capital and distressed investments.

Private Equity Fund: An investment vehicle, typically a Limited Partnership, formed to make investments in private companies via a pool of available equity capital.

Portfolio Company: A company acquired and owned by a private equity fund.

Recapitalization: A financing transaction whereby a company borrows money from a third-party financing source such as a commercial bank in order to generate cash for a pre-defined purpose such as funding a purchase and sale agreement, declaring a cash dividend, undertaking an acquisition, or conducting a leveraged buyout (see leveraged buyout). Related uses or terms: Leveraged recapitalization

EBITDA: A financial term that is a rough proxy for free cash flow. Formally defined as Earnings Before Interest and Taxes plus Deprecation and Amortization.

Free Cash Flow: The cash generated by a business on a pre-tax, pre-interest basis after making positive adjustments for non-cash expenses such as depreciation and amortization as well as owner-related benefits and negative adjustments for capital expenditures. Formally defined as Operating cash flow (Net Income plus depreciation and amortization plus taxes plus interest) minus capital expenditures and dividends.

Leveraged Buyout: The acquisition of a business utilizing equity or investment capital and third-party debt financing. Typically includes a change of control or change of ownership. Related uses or terms LBO (Leveraged Buy Out)

Management Buyout: A process whereby management of a company acquires all or some of the ownership of the company they manage either independently or in partnership with a private equity fund. Related uses or terms: MBO (Management Buy Out)

Growth Capital: An investment made in an operating company by an outside investor to support existing or anticipated expansion of the business. May or may not include a change of equity control but frequently involves the exchange of equity ownership.

Committed Equity Capital: Equity investment funds readily available to an investor to make investments according to a pre-defined investment strategy. Related uses or terms: capital under management, capital available for investment

Search Fund: An individual or group of individuals seeking to identify an acquisition candidate that the individual or group can acquire and subsequently manage. Typically, search funds do not have dedicated capital to acquire a business but, rather, have informal pledges from potential investors. Related uses or terms: fund-less sponsor

Business Broker: An individual (or company) that solicits and represents business owners that are considering selling their business and acts as an intermediary between sellers (business owners) and buyers. Related uses or terms: business intermediary, investment banker

Letter of Intent: A formal, written document indicating the terms a buyer is offering a seller in a proposed acquisition or investment. Although not a contract, it is a document stating a serious intent, by both parties, to carry out the proposed acquisition. Related uses or terms: LOI (Letter Of Intent), term sheet.

Due Diligence: A process where a buyer inspects a potential investment. Often includes a detailed review of accounting history and practices, operating practices, customer and supplier references, management references and market reviews.