Carried interest a share in the profits of a private equity fund.

Typically, a fund must return

the capital given to it by limited partners plus any preferential rate of return
before the general partner can share in the profits of the fund. The general
partner will then receive a 20% carried interest, although some successful
firms receive 25%-30%. Also known as “carry” or “promote”.
Clawback provision the limited partners' right to reclaim part of the general partners' carried
interest, in cases where subsequent losses mean that the general partners
received excess compensation.
Committed capital Committed capital (also known as "commitments") is a contractual
agreement between an investor and a venture capital fund that obligates
the investor to contribute money to the fund. The investor may pay all of
the committed capital at one time, or make contributions over a period of
time. This often takes place over a number of years.
Cumulative When private equity investors consider a fund's investment track record,
distributions they need to know the amount and timing of the fund's
cumulative distributions, which is the total amount of cash and stock that
has been paid out to the limited partners.
Dividend It occurs when the owner of a company, typically a PEG, as a preferred stock
recapitalization holder, issues new debt to pay a special dividend to their limited partners
who provided the cash to fund the initial acquisition of the portfolio
company. A dividend recap is an alternative to way of realizing cash, other
than selling the company or trying an IPO. For example, a PEG that invested
$10 million cash in acquiring a company, may choose today to pull out $10
million cash in a dividend recap.
DPI DPI, or distributions to paid in capital, is one type of multiple used to
evaluate private equity performance. Multiples help investors analyze fund
performance by providing a measure of value relative to investment cost.
DPI measures the realized, or cash-on-cash, return on investment
Drawdown A drawdown is a peak-to-trough decline during a specific period for an
investment, trading account, or fund. A drawdown is usually quoted as the
percentage between the peak and the subsequent trough. If a trading
account has $10,000 in it, and the funds drop to $9,000 before moving back
above $10,000, then the trading account witnessed a 10% drawdown.
Or:
When a PE firm decides to make an investment, it will approach the LPs in
order to draw down their money. This is the actual act of
transferring the committed capital. This amount should include
management fees
EBIT (Operating EBIT (earnings before interest and taxes) is a company's net income before
income) interest expense, and income tax expense have been deducted. EBIT is often
considered synonymous with operating income, although there are
exceptions. Investors and creditors use EBIT to analyze the performance of a
company's core operations without tax expenses and capital structure costs
distorting the profit figures. EBIT is calculated by the following formula:
EBIT = Net income + Interest expense + Tax expense
EBITDA which stands for earnings before interest, taxes, depreciation, and
amortization. EBITDA is used as a way to measure company performance.
EBITDA indicates whether a business is profitable by revealing the amount of
its normal operational earnings.
EBITDA has many uses in addition to the M&A sales process. For traders,
analysts, portfolio managers, and others, it is an indicator of whether
companies are properly valued. It is also a gauge for lenders to know if
companies will be able to pay their future debt obligations. However, while
EBITDA provides a valuable snapshot of a point in time in a firm’s cycle, it
does not necessarily provide a complete picture of a business’ true value or
performance.
Enterprise value s a measure of a company's total value, often used as a more
comprehensive alternative to equity market capitalization. EV includes in its
calculation the market capitalization of a company but also short-term and
long-term debt as well as any cash on the company's balance sheet.
It is calculated as the market capitalization plus debt, minority interest and
preferred shares, minus total cash and cash equivalents. EV =
marketvalue of common stock + market value of preferred equity +
market value of debt + minority interest - cash and investments

Equity value Equity value, commonly referred to as the market value of equity or market
capitalization, can be defined as the total value of the company that is
attributable to equity investors. It is calculated by multiplying a company’s
share price by its number of shares outstanding.
EV/EBITDA multiple This popular metric is used as a valuation tool to compare the value of a
company, debt included, to the company’s cash earnings less non-cash
expenses. It's ideal for analysts and investors looking to compare companies
within the same industry.
General partners General partners are responsible for managing the investments within the
private equity fund. They can be legally liable for the actions of the fund. For
their services, they earn a management fee, typically 2% of commitments
paid annually although there are exceptions when the rate is less. In
addition, the general partners earn a percentage of the fund's profits, which
is called carried interest. Carried interest is the general partner's share of
the profits of the investments made within a private equity fund. The share
can range from 5% to 30% of the profits.
Gross profit The total profit a company receives after the cost-of-goods-sold is
subtracted from the total revenue ,but before taxes, interest and other
expenses are taken out.
Hurdle rate A hurdle rate is the minimum rate of return on a project or investment
required by a manager or investor. The hurdle rate denotes appropriate
compensation for the level of risk present; riskier projects generally have
higher hurdle rates than those that are less risky.
Initial Public offering The first offering of stock by a company to the public. New public offerings
must be registered with the Securities and Exchange Commission. An IPO is
one of the methods that a start that has achieved significant success can use
to raise additional capital for further growth. Leveraged Buyout (LBO) –the
purchase of a company or a business unit of a company by an outside
investor using mostly borrowed capital
IRR the interest rate at which a certain amount of capital today would have to
be invested in order to grow to a specific value at a specific time in the
future
Leveraged buyout is a financial transaction in which a company is purchased with a
combination of equity and debt, such that the company's cash flow is the
collateral used to secure and repay the borrowed money.
Limited partners Limited partners are usually institutional or high-net-worth investors
interested in receiving the income and capital gains associated with
investing in a private equity fund. Limited partners do not take part in the
fund's active management. They are protected from losses beyond their
original investment as well as any legal actions taken against the fund.
Management fee a fee charged to the limited partners in a fund by the general partner.
Management fees in a private equity fund typically range from 0.75% to 3%
of capital under management, depending on the type and size of fund.
Net Asset Value the total value of all the securities owned by a mutual fund, less any
liabilities, divided by the total number of shares owned by its investors.
When an investor buys an open-end fund, they pay the NAV. When they sell,
they receive the NAV. A close ended fund also has a NAV, but the price paid
or received is determined by the market and depends on factors such as
supply and demand.
Net income A company’s profit after operating expenses, taxes, interest expenses,
extraordinary items and minority interest are deducted from the gross
profit. This number is divided by the number of outstanding shares in a
company to find out the earnings per share (EPS.)
Paid-in capital Money that is invested into a company by shareholders, primarily though
the purchase of equity.
PIC or investment the capital contributed by LPs to the fund. Paid-in-capital is also known as
level “contributed capital” or “called capital” or sometimes “drawn capital.” Note
that Paid-in-Capital is different than Committed Capital. Recall that an
investment in a private equity fund occurs over time. An investor in the
fund, known as a limited partner or LP, agrees (commits) to invest a certain
amount in a fund, say $10 million, as and when the manager of the fund,
known as a general partner or GP, needs the capital. In this case, the $10
million is the LP’s commitment. As the GP asks for a portion of this
commitment (known as a “call”), the amount paid by the LP to the fund is
known as Paid-in-Capital, or PIC (this is also known as “called capital”).
Pre-tax income company's income after all operating expenses, including interest and
depreciation, have been deducted from total sales or revenues, but before
income taxes have been subtracted. ... Also known as pretax income or
earnings before tax
Revenue The income a company earns from services and sales.
RVPI RVPI (Residual Value to Paid-in-Capital). Residual Value to Paid-in-Capital is
the ratio of Residual Value (the remaining value of the fund) to Paid-in-
Capital, which is also expressed as a multiple, such as 1.0 or 1.0x. The RVPI
equation is as follows:
Residual value/Paid-in-Capital
Secondary buyout Secondary buyouts often make sense when the selling firm has already
realized significant gains from the investment, or when the buyer private
equity firm can offer greater benefits to the firm being bought and sold.
TVPI The investment multiple is also known as the total value to paid-in (TVPI)
multiple. It is calculated by dividing the fund's cumulative distributions and
residual value by the paid-in capital. It provides insight into the fund's
performance by showing the fund's total value as a multiple of its cost basis.
It does not take into account the time value of money.
Total Value to Paid-in-Capital is the ratio of Total Value to Paid-in-Capital,
also expressed as a multiple, such as 1.0x or 2.0x. The equation is as follows:
Total Value/Paid-In-Capital

Vintage year The vintage year is the year in which the first influx of investment capital is
delivered to a project or company. This marks when capital is contributed
by venture capital, a private equity fund or a partnership drawing down
from its investors.
WACC The weighted average cost of capital (WACC) is a calculation of a firm's cost
of capital in which each category of capital is proportionately weighted. All
sources of capital, including common stock, preferred stock, bonds, and any
other long-term debt, are included in a WACC calculation. A firm’s WACC
increases as the beta and rate of return on equity increase because an
increase in WACC denotes a decrease in valuation and an increase in risk.